Your credit card is a tool that can help you make purchases and pay some of your bills, but you can use it when you need cash, too. A cash advance allows you to borrow money against your available credit limit, acting like a short-term loan.
Cash advances can be quick and convenient but come with high costs and credit implications. Understand how they work before you get one.
[Read: Best Rewards Credit Cards.]
What Is a Cash Advance?
A cash advance is a way of borrowing money from your credit card.
“Rather than paying for a good or service, you’re using your credit card to take out a cash loan,” says Tara Alderete, director of enterprise learning with Money Management International, a nonprofit credit counseling agency.
You get the money as cash upfront and then start repaying your card issuer soon after the transaction. The amount you can borrow is usually set as a percentage of your credit card limit. If your card limit is $5,000 with an advance limit of 20%, for example, then you could borrow up to $1,000.
You’ll be responsible for interest charges and fees on top of the amount you borrow.
That’s because “Cash advances are generally seen by creditors as riskier than other types of spending,” Alderete says. “It can be an indication that someone has encountered financial hardship, so creditors offset that risk with higher fees and interest rates.”
Cash withdrawals are only one type of cash advance. Card issuers and merchants may also treat other transactions as advances. These may include:
— Gift cards and prepaid debit cards.
— Cryptocurrencies, such as bitcoin.
— Traveler’s checks.
— Money transfers using payment apps such as Venmo and PayPal.
— Foreign currency exchanges.
— Gambling transactions, such as lottery tickets and casino chips.
How to Get a Cash Advance on Your Credit Card
The process of getting a cash advance doesn’t change much from card to card. First, find out how much you’ll pay to get the cash advance. If you choose to proceed, you can head to an ATM or bank to get your money, or use convenience checks from your card issuer.
Here are the steps involved:
1. Check your card agreement.
Your card agreement will help you understand the costs and restrictions of borrowing against your credit card. You can call your issuer and ask for a copy of your agreement if you need one, or the Consumer Financial Protection Bureau maintains a searchable database of card agreements from hundreds of issuers.
The card agreement should note the annual percentage rate as well as fees and limits associated with cash advances. These transactions usually come with a fee, and “The APR on cash advances will be higher than on purchases, ultimately making your balance more expensive,” says Ryan Conte, assistant vice president of member services at BHCU, a credit union in Delaware County, Pennsylvania.
2. Find your repayment details.
Making sure you understand how repayment works is also important. Interest usually starts accruing once you borrow the cash, meaning you have no grace period where you won’t incur interest as long as you pay your balance in full by the due date.
When you make a minimum monthly payment, it can be applied first to the balance with the lowest interest rate. If the minimum payment isn’t large enough to pay off your cash advance, then interest will continue accruing on that balance.
If you pay more than the minimum, then your card issuer must put the excess toward the balance with the highest APR, which may be your cash advance.
But generally, the interest rate on your cash advance can work against you. “A higher interest rate means that the debt can begin to snowball much more quickly,” Alderete says. “A balance that would normally be manageable through regular charging may be unmanageable as a cash advance.”
3. Determine how much to withdraw.
You might have an idea of how much you need to borrow, but credit card companies often limit the amount you can withdraw as a cash advance. Depending on how much cash you need and your card’s limit, you might come up short.
You can find out your cash advance limit by logging in to your online account or contacting your card issuer.
When you’re thinking about how much cash to withdraw, consider how the cash advance will affect your credit. The advance will add to your credit card balance, which increases your credit utilization and affects your credit score.
Financial experts caution against using more than 30% of your credit limit. That means if your total credit limit is $5,000, then you would aim to take out less than $1,500.
4. Get your money.
Once you know what you can borrow and how much it will cost, you are ready to get your cash advance. Here are four ways:
— ATM. You can get your cash at an ATM using a personal identification number. If you don’t have a PIN, contact your card issuer and ask for one. At the ATM, you will insert your card, select the cash advance option, enter the amount and take your cash. The ATM owner may charge a fee to process the payment.
— In person. You can also go to a physical bank or credit union that offers cash advances. Bring the credit card you’re planning to use and a photo ID. The bank may charge a fee for the service.
— Online. You may be able to transfer funds directly from your credit card to your bank account.
— Convenience check. Some credit cards provide cardholders with convenience checks, which work like personal checks. You can write one of these checks to a third party or cash it yourself. When you use the check, it is considered a cash advance.
How Much Does a Cash Advance Cost?
Because of interest charges and fees, a cash advance costs more than just the money you borrow.
Card issuers may set a higher APR on the cash advance balance and charge a fee, which is usually calculated as 3% to 5% of the cash advance amount. If you take out the cash at an ATM, bank or credit union, you could pay another processing fee.
Say you want to take a $1,000 cash advance from your credit card, and your issuer charges a 5% fee to take the advance. You’ll also pay an APR of 30%, and you get the cash at an ATM with a $5 processing fee. If you repay the cash advance over three months and charge nothing else to the card during that time, the transaction will cost you $80 on top of the $1,000 you borrowed.
Here’s how it breaks down:
— $1,000 for the cash advance.
— $50 for the card fee.
— $25 in interest.
— $5 for the ATM fee.
A cash advance might cost you in other ways, too. The amount you borrow will lower your available credit, which you may need for a purchase. It also increases your utilization, which may lower your credit score.
Pros and Cons of Cash Advances
— Convenience. A credit card cash advance offers fast access to cash when you need it.
— No application. You don’t have to apply for a cash advance and wait for an approval decision, as you do with a loan or a new credit card.
— Flexible repayment. You can pay back the cash advance in full, select the minimum amount you owe or choose another amount somewhere in between.
— High fees and interest rates. These increase your borrowing costs.
— Cash advance limits. Your credit card issuer may only allow you to withdraw a small portion of your credit line in cash.
— No grace period. That means you’ll be charged interest on the advance immediately.
[Read: Best Low-Interest Credit Cards.]
Alternatives to Cash Advances
Because cash advances come with high costs and increase your credit utilization, you may want to look at alternatives. Here are a few to consider:
Personal loans from a bank or online lender. You may be able to get more money and a lower interest rate.
Payment plans. Some health care providers, such as doctor’s offices, allow you to split your debt into monthly installments that you’ll pay over time with no interest, Alderete says.
Your own funds. If you have an emergency fund, dip into your savings and replenish it when you have the money later. This option comes with no interest, application or fees.
Local organizations. Nonprofits or charities may provide help in times of financial crisis.
Borrowing from friends or family members. If you don’t have an emergency fund, then borrowing from a friend or relative could help you avoid interest charges and fees, with no hit to your credit.
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