Published in: Credit Cards | Oct. 26, 2019
How Does a Credit Card Cash Advance Work?
By: Christy Bieber
Considering a credit card cash advance? Here's what to expect.
Credit cards allow you to charge purchases now and pay for them later. But not everyone accepts payments via credit card -- and there may be times when you need to access cash quickly to pay for expenses you can't charge on your card.
You can do this by taking a credit card cash advance. But it is rarely a good idea.
Unfortunately, credit card cash advances can be very expensive and often cost a lot more than you realize. Although it may be better than taking out a payday loan, you should consider a cash advance only as a last resort and make sure you understand what it costs first.
How to get a credit card cash advance
When you take a credit card cash advance, you use your credit card to withdraw an amount of money that is less than or equal to your cash advance limit. You can access the money at an ATM or by using a convenience check from your creditor and then use the money for any purpose you'd like.
Assuming you are eligible, you can take your credit card to an ATM, enter your card's PIN, and withdraw the amount of cash you need. Your cash advance limit will likely be lower than the total credit available to you. For example, if you have a $5,000 spending limit on your card, you may be limited to a $1,000 cash advance.
You are only eligible for a credit card cash advance if your credit card allows it. Most (but not all) credit cards do. Check your cardmember agreement or call the customer service telephone number on the back of your card to find out whether you can take out a cash advance.
Chances are good that you'll have to specifically ask your card issuer for the PIN you need in order to access the money for a cash advance from an ATM. In some cases, you'll be sent your PIN by mail so will have to wait several days for it. You may also be able to find your PIN under Account Features or Account Services online.
Your credit card issuer may also provide you with convenience checks, either at your request or as a courtesy. You can write one of these checks out to yourself and deposit it in your bank account to take out a cash advance.
Credit card cash advance fees
The first thing you need to know is that when you take out a cash advance on your credit card, there's no grace period.
Normally, when you charge something, you have until the bill is due to pay off the charges before you start accruing interest. This doesn't happen with a cash advance -- interest starts accruing as soon as you get the money out of the ATM or as soon as you deposit a convenience check into your bank account and the transaction is complete.
Unfortunately, this means you'll have to pay interest on the cash advance, even if you pay off all the cash you withdrew when your statement comes.
Not only does interest start accruing immediately, but many credit cards also charge a higher APR on cash advances compared with the APR charged on purchases and balance transfers. This means you'll pay much more interest than you would with other card transactions because you pay interest for longer and at a higher rate.
Credit cards also typically charge a fee for a cash advance. It's common for this fee to be around 5% of the cash you take out with a minimum fee of $10 per transaction. So if you borrow $1,000 via a cash advance that charges a 5% fee, you'd incur an upfront fee of $50, plus interest would start accruing on the borrowed money immediately.
Although cash advances are a very expensive way to borrow, these costs and fees can be cheaper than payday or car title loans. But you should still try to avoid taking out a cash advance whenever possible to avoid these extra expenses.
How to pay off a credit card cash advance
Your cash advance balance is separate from other balances you carry on your credit card, such as your purchase balance and the amount you owe on any balance transfers.
If you only make your minimum credit card payment, the card issuer can apply the payment to any balance that it wants. This means the whole of your minimum payment can be applied to reduce your purchase balance while your more expensive cash advance balance doesn't decline at all.
If you pay more than the minimum payment, though, the CARD Act -- a consumer protection law passed in 2009 -- requires that creditors apply the payment to the balance with the highest interest rate. So if you want to chip away at your cash advance balance, you'll need to make substantial extra payments to your creditor.
Should you get a credit card cash advance?
Generally speaking, you should not take out a credit card cash advance because you will have to pay high fees as well as very high interest that starts accruing immediately. And it may take you a long time to pay back the cash advance if you're making only minimum payments and have to pay off your purchase balance or transferred balance first.
However, if you are in dire need of cash and have no cheaper options, then it can make sense. It might be better to take out a cash advance for rent money rather than get evicted, for example, or to take out a cash advance to pay for an essential car repair rather than taking out a payday loan or a car title loan. If you're abroad and you need fast access to cash, taking a credit card cash advance can also make sense, provided you have a PIN and can access the funds from an ATM.
Alternatives to a credit card cash advance
Before you take out a cash advance, always consider less expensive alternatives.
If you can, try to find a way you can charge a purchase instead. This can be cheaper than taking out a cash advance, even if it's a little more expensive to charge something than it would be to pay cash. If you're out of cash for the bus, for example, it could be less expensive in the end to charge an Uber than to take a cash advance to be able to pay for the bus and get stuck paying the fee and interest on the cash you've taken out.
If you are trying to pay a bill and can't do it with your credit card, check out payment services such as Plastiq, which allow you to pay almost any bill with your credit card. Although these services charge fees, the costs associated with them may be cheaper than paying all of the expenses associated with a cash advance.
You should also consider other means of borrowing, such as a personal loan. A personal loan tends to have a much lower interest rate than the one you'd pay on a credit card cash advance. It also provides you with a set schedule for loan repayment and you'll know your costs up front, as opposed to taking out a cash advance and potentially having no idea how long it is actually going to take you -- or how much in total you'll have to spend -- to pay back what you borrowed.
Avoid a credit card cash advance except as a last resort
Now you know how credit card cash advances work: You access money from your credit card using an ATM or convenience check. You also know that they should be avoided due to high interest costs and fees -- except when you are in dire need of funds and have no other way to get them.
Remember, before you take out a cash advance, it's helpful to understand the total costs, make a payback plan, and consider cheaper alternative sources of financing first.
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