Is This the Worst Way to Use Your Credit Card?

The most common way to use a credit card doesn't require much explanation. You can use your card to make purchases in person, or you can manually type in its information on an e-commerce website to buy something online.

You can also use your credit card to get access to cash via an ATM -- but is this a good idea? Let's take a closer look at cash advances, how they work, and why they are best avoided.

What's a cash advance?

A credit card cash advance is a way to take cash out of your card. It counts toward your credit limit (which isn't to say you'll be able to access that entire limit; more on this below). You'll be able to use a cash advance PIN (available from your card issuer) to take cash out of an ATM. You might also be able to use a convenience check provided by your credit card issuer (sometimes these will come in the mail with a new card) and basically write a check on the cash advance limit.

Some purchases with your credit card are coded as cash advances, such as lottery tickets (Pro Tip: Don't use your credit card to gamble), money orders, and some gift cards. If something you're buying could potentially turn into cash, your card issuer may treat the transaction as a cash advance.

Why is a cash advance a bad idea?

Let's start with the cost of a cash advance. For starters, you'll be charged a fee to take out a cash advance -- according to Experian, cash advance fees commonly amount to 5% of the amount you take out or $10, whichever is greater.

Plus, you'll likely be charged a higher APR on a cash advance than you would for using your credit card as a payment method. I checked this on one of my credit cards and found that my APR for a cash advance is 29.99% -- meanwhile, my purchase APR on that same card is 21.24%.

Unlike with a credit card purchase, you don't get a grace period with a cash advance. That higher APR starts accruing immediately, so even if you pay the money back within the month, you'll pay interest on it.

Finally, if you're hoping to cover a large expense with a cash advance, you might be out of luck. You might have a substantial credit limit on the card, but your cash advance limit will be quite a bit less, depending on the issuer and the card.

For that same credit card of mine, my cash advance limit is a paltry 5% of my total credit limit. Oh, and you won't even earn rewards on your cash advance like you would with regular credit card spending.

Better ways to get cash in a hurry

Need a fairly small amount of money fast (say, $500)? Rather than turning to cash advances, consider these options:

• A small-dollar loan from your bank: You might be able to borrow several hundred dollars from your regular bank in exchange for a flat fee and then pay it back over a few months.
• A payday alternative loan (PAL): Are you a credit union member? You might have access to one of these loans, which have capped fees and interest rates (unlike their similarly named predatory counterpart, payday loans -- avoid these).
• Borrow from your credit card issuer: Some credit card companies also offer small loans that have more favorable terms than cash advances.
• Ask friends or family: Perhaps you have people in your life who are in a position to extend you a small loan. Just put the terms in writing and pay them back -- they are doing you a huge favor.

Taking out cash advances isn't a good move. Doing so can cost you money and a potential debt headache.