Credit cards are powerful financial instruments, and every purchase you make with your card represents a loan to you from the card issuer. But when you need to use your credit card to access cash from an ATM, it isn’t actually considered a purchase. It’s called a cash advance, and it’s an entirely different kind of credit card transaction.
How Cash Advances Work
When you use your credit card to make a cash advance at an ATM, you must choose a four-digit personal identification number in advance, just like you would with an ATM card, and you use that number to process the transaction. But the similarities to using an ATM card end there. Unlike a withdraw of your existing funds, a cash advance represents a loan to you by your credit card issuer, and it will almost always include different fees and terms than your purchases do.
[Read: The Best Rewards Credit Cards of 2017.]
For example, most credit cards will impose a cash advance fee on these transactions. A cash advance fee is typically 3 to 5 percent of the amount advanced or $10, whichever is greater. This fee is in addition to any fees charged by the operator of the ATM. According to a 2017 Bankrate survey, the average fee for an out-of-network ATM withdrawal is $4.69. And if you are receiving a cash advance outside the United States, your credit card can also impose a foreign transaction fee. While there are many travel rewards credit cards that no longer have this fee, most cards still exact a 3 percent fee on charges processed outside the United States, regardless of the currency used.
Also, your cash advance will not have a grace period. This means you will always incur interest on the transaction, even if you are able to avoid interest on your purchases by paying your statement balance in full. Finally, most credit cards have a different interest rate for cash advances, and it’s usually higher than the rate that applies to purchases. It’s not uncommon to be charged a 25 to 30 percent APR for your cash advances.
Why Is a Cash Advance So Expensive?
A cash advance represents an unsecured loan to you from a card issuer. Card issuers have found that these loans represent a much higher risk of default compared with purchases.
Eric Bahl, director of product and channel development at PenFed Credit Union, says, “Cash advances are more expensive because the behavior generally carries more inherent risk for the issuer. Years of experience and modeling have demonstrated to the industry that a cardholder who seeks and uses a cash advance has a higher likelihood of not repaying the loan.”
[Read: Best Low-Interest Credit Cards of 2017.]
Alternatives to Cash Advances
Sean Bryant, founder and editor of personal finance website One Smart Dollar, says cash advances are typically a last resort option for consumers. “They are used when cash is necessary and you have nowhere else to turn.”
With credit cards imposing high interest charges and fees on cash advances, cardholders are smart to look for alternative ways to access cash. The easiest way is to simply use your debit card to withdraw funds from your checking or savings account. Debit cards have fewer fees, even if you need to access cash while traveling outside the United States. In fact, exchanging cash for foreign currency with a debit card will still cost much less than a cash advance from your credit card.
All Discover cardholders have a way of receiving a cash advance without incurring the fees and higher interest charges that most credit cards exact. The company offers a feature that allows you to request a cash advance at the time of purchase at dozens of retailers. These transactions are limited to $120 every 24 hours, but there’s no monthly limit. There is no cash advance fee for these transactions, which are treated just like any other purchase. This means that the standard interest rate for purchases will apply, and the amount advanced is subject to the same grace period as other purchases.
[Read: Best No Annual Fee Credit Cards.]
Finally, consider one of several online alternatives to cash advances. Services like PayPal, Square Cash and Venmo offer person-to-person transfers. However, one party will always be responsible for paying a fee of about 3 percent when a payment is made using a credit card. Other payment services that accept credit cards include Western Union’s Money in Minutes, though it also carries fees.
Bottom Line
A cash advance is one more tool that you have available as a credit card user, but it can be an extremely expensive option. By looking for alternatives to a credit card cash advance, you can save a significant amount of money on fees and interest charges.
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What Is a Cash Advance? originally appeared on usnews.com
