Getting access to cash in a pinch can be daunting, especially if you don’t have enough in your checking account to cover an emergency. One way to get some cash quickly is by taking out a cash advance on your credit card. Beware: A cash advance is not free cash. Odds are your cash advance will be a hefty expense — luckily, there are alternatives available that could save you money.
What is a cash advance?
A cash advance is a short-term cash loan borrowed against a credit card’s limit. Similar to how you repay purchases made with a credit card, you must also pay back the money borrowed with a cash advance. However, the interest rate for borrowing money from a cash advance is often significantly higher than the interest rate on regular credit card purchases. Additionally, most issuers impose a cash advance fee — often 3 to 5 percent of the transaction amount.
How cash advances work
You can initiate a cash advance in a few ways. If you have a credit card with a PIN, you can use the PINto withdraw cash from an ATM (subject to ATM fees). If your credit card issuer has physical branch locations, you can request a cash advance from a teller inside. Finally, if you have access to checks via your card issuer, you can write out a check to yourself and cash or deposit it as needed. In addition to higher interest rates on cash advances, your card issuer starts charging interest on the cash advance amount immediately.
Cash advance interest rates
The interest rate on a cash advance will likely be significantly higher than your regular purchase APR (often close to 30 percent variable). There is also no grace period for cash advance interest rates, so you’ll start accruing this inflated interest immediately. To figure out your card’s exact cash advance interest rate, look in its terms and conditions for the Schumer Box, an easily digestible table that lists your card’s important information. The info you find in the Schumer Box includes your card’s regular APR, penalty fees, late fees and your cash advance interest rate.
For example, let’s say the ongoing variable APR for a credit card is 11.99 percent to 22.99 percent, making it a relatively low-interest credit card. But if you check the rates and fees in the fine print, you might see the APR for a cash advance is 24.99 percent to 29.99 percent variable, which is much higher than what you could expect from the average credit card interest rate.
Cash advance credit line
Your cash advance credit line is the maximum amount of cash you can take out on your credit card and is a percentage of your card’s total credit line, which depends on the credit card and issuer. Remember, you are still using a portion of your credit card’s normal credit line when you take out a cash advance, so those funds are not available to make purchases.
Should you do a cash advance?
You should only consider taking out a cash advance in emergencies. Getting a cash advance is better than taking out a predatory payday loan, but it’s still best to seek out potentially more cost-effective solutions. Here are a few alternatives to contemplate before getting a cash advance:
- Dip into an emergency fund: If you have a bit of extra cash saved up, it’s better to dip into those emergency funds first, rather than use a cash advance.
- Borrow from a friend or family member: You could skip out on inflated interest costs altogether by borrowing from friends and family if they have the means.
- Look into local organizations: Local community centers, nonprofits or religious organizations may have the capacity to help in times of financial crisis.
It may not be possible to avoid a cash advance altogether. If you do have to get a cash advance, try to take out as little as possible and craft a plan to start paying it back immediately to minimize the long-term costs.
The bottom line
You should avoid taking out a cash advance whenever possible; however, this small loan can be a viable option in a financial emergency. Before you immediately jump to taking out a cash advance, try dipping into an emergency fund or borrowing money from a friend or family member. Exploring other lower-cost options will save money over time, so be aware of your choices when considering a cash advance.
FAQs
Similar to how you repay purchases made with a credit card, you must also pay back the money borrowed with a cash advance. However, the interest rate for borrowing money from a cash advance is often significantly higher than the interest rate on regular credit card purchases.
How does a cash advance work? ›
When you take out a cash advance, you're borrowing money against your card's line of credit. You must repay this loan and the amount you transfer cannot exceed the current balance available on your credit card. The amount of the cash advance is then added to your credit card balance.
What is an example of a cash advance? ›
For example, if you carried a balance of $500 on your credit card and took a cash advance of $100, you'd have to pay off the initial $500 before your payments are applied to the higher-interest cash advance of $100.
Does a cash advance hurt your credit? ›
Using your credit card for a cash advance doesn't directly affect your credit score. Your credit report won't show that you used your credit card to get cash. However, the cash advance does increase your credit card balance and could hurt your credit score if it pushes your credit utilization ratio too high.
Is cash advance a good idea? ›
Taking out a cash advance may seem like a good idea in the moment, but it can quickly lead you to rack up debt. We recommend avoiding a cash advance altogether and opting for some alternative options that have better terms. Borrow from family or friends: You can ask family or friends for a loan.
Are cash advances a good way to borrow money? ›
Cash advances are an expensive way to borrow money, and if you're not careful, you could find yourself paying more than what you bargained for. When you need cash in a pinch, there are other alternatives that may make more financial sense. Here are some to consider: Use your credit card.
Do I need to pay back a cash advance? ›
You might be able to pay back a cash advance as soon as it's posted to your account. However, you may need to repay more than you borrowed because many credit cards charge a cash advance fee. Interest can also start accruing daily, leading to a larger balance if you don't pay off the cash advance quickly.
What is an example of a cash in advance? ›
An example of cash in advance in international trade is when an exporter requires the customer to make a wire transfer or credit card payment before shipping the goods. The exporter receives the payment in cash before fulfilling the order, ensuring guaranteed payment and reducing credit risk.
What are three key reasons why a cash advance is not a good idea? ›
It usually comes with:
- A higher APR than you pay on credit card purchases (Cash advances are the most expensive credit card products from an interest perspective.)
- Additional cash advance fees that are figured as a percentage of the loan amount (Sometimes this fee is as much as 5%.)
Your credit card cash advance limit will typically be lower than your credit limit, with a typical limit falling between 20% to 50% of your total spending limit. For example, if you have a $5,000 credit limit on your card, your cash advance limit will likely be less than $2,500.
However, to avoid using cash advances try these options instead:
- Determine If You Really Need the Money.
- A Private Loan from Family or Close Friends.
- Withdraw from Your Assets.
- Ask for a Bank Loan, Consolidation Loan, Line of Credit, or Credit Card Limit Increase.
- Emergency Savings Fund.
Cash advance apps offer a limited borrowing limit and can be untrustworthy if it's not well-reputed. Although easily accessible and quick, payday loans carry hefty fees and high interest rates. Their short-term nature can trap you in a cycle of debt if not repaid promptly.
What happens if you don't pay back cash advance apps? ›
The Potential Consequences of Not Paying Back a Cash Advance
This will result in constant attempts at collecting the money, which can cause stress and will likely appear on your credit report, which will have a detrimental effect on your credit and financing options.
What is risky about a cash advance? ›
Interest rates on cash advances are often much higher, and if you don't pay it back quickly, interest charges can greatly increase the amount you owe. No grace period: You'll start paying interest on the day you take the advance (and beyond).
What are three disadvantages of a cash advance? ›
Cons
- Extremely high APR and fees.
- No grace period—credit card cash advances begin accruing interest on day one.
A cash advance is when you withdraw money against your credit card limit. Essentially, it allows you to withdraw cash like a debit card but with some key differences. You should only use a cash advance for emergencies.
How does a cash advance at work work? ›
Generally, employers who offer such a program give employees either cash or a cashier's check for an agreed-upon amount, and then withhold a percentage of upcoming paychecks to pay off the loan. The employee is not charged interest, so essentially he is simply receiving part of his paycheck early.
How do I pay down a cash advance? ›
How do I pay off a cash advance on my credit card? The cost of a cash advance is added to your credit card balance. This means you can pay off the cash advance amount in the same way you'd make any other credit card payment.
How do I withdraw a cash advance? ›
Insert your credit card into an ATM, enter your PIN, choose the cash advance option, and enter your withdrawal amount. Cash advances can have higher APRs than purchases or balance transfers, and interest starts accruing on them right away. Plus they often have fees.
How does a cash advance check work? ›
Credit card convenience checks allow you to write checks against a line of credit. These convenience checks are often processed as a cash advance, which can be expensive. It's a good idea to consider alternatives before using a convenience check to borrow against your credit card.
