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How a Credit Card Cash Advance Works and When to Use

| Money Rates Columnist.
min read

bad-credit-driver-sideCredit cards are convenient for making purchases and some allow you to earn rewards when you spend.

When you need money in a financial emergency, however, your credit cards could also be a quick source of cash if you're able to get an advance against your credit limit.

Taking a credit card cash advance is something you may consider as an alternative to a payday loan or other short term loan option. Getting an advance from your credit card has both pros and cons, however, so it's important to fully understand how it works before deciding to use one.

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What Is a Credit Card Cash Advance?

A credit card cash advance is essentially a type of short-term loan that you take against your credit card limit.

Ordinarily, when taking out a loan, you'd have to go through the process of applying with a bank or credit union, being approved, then waiting for the loan to be funded. A cash advance allows you to sidestep that process.

The amount of money you can borrow with a cash advance is determined by your credit card issuer and by your card limit.

Though it sounds similar to the types of advances offered by payday lenders, you're borrowing money from your available credit rather than taking an advance against your paycheck.

How a Credit Card Cash Advance Works

Normally, you use a credit card to make purchases. Those purchases then reduce your available credit limit. With a cash advance, you're taking cash directly from your available credit line.

There are a few ways to request and receive a cash advance, including:

  • Electronic deposit into a linked bank account
  • Credit card convenience checks
  • ATM withdrawal

Your credit card company may allow you to request a cash advance online and have money transferred directly to your linked bank account. This could be the simplest option for receiving a credit card cash advance if you can wait a day or two for an electronic deposit to be processed.

Convenience checks are paper checks you can use to take a cash advance. You simply write the check out to cash and take it to the bank to have it cashed or deposited into your bank account. Alternatively, you can use convenience checks to pay bills or cover a financial emergency directly. These checks shouldn't be confused with balance transfer checks, which allow you to transfer a balance from one credit card to another.

The third option is withdrawing cash at the ATM. For this to work, you would need to set up a PIN for your credit card. Once you've received a cash advance - either via electronic deposit to your bank or credit union, convenience check or ATM withdrawal - you can use the money as needed to pay bills or cover other expenses.

Pros and Cons of Taking a Cash Advance from Your Credit Card
Pros Cons
Quick way to access cashInterest rates are higher
No loan paperwork to fill outInterest starts being charged immediately
No credit checkCash advance fee
Less expensive than payday loan

Credit Card Cash Advance Pros

There are some advantages to taking a credit card cash advance in a financial emergency.

If you don't have an emergency fund in place, a cash advance is a fairly quick way to get money for necessary expenses. In a situation where you can't cover an expense by writing a check from your bank account or charging it to your card, a cash advance can close the financial gap.

Requesting a credit card cash advance also means you don't have to go through the process of applying for a loan or line of credit. That means no lengthy paperwork to fill out, no credit check to undergo and no waiting for a loan application to be approved.

Compared to other short-term loan options such as a payday loan or car title loan, a credit card cash advance can also be the more affordable borrowing option. While there are interest charges and fees involved, payday lenders can charge more for quick loans, easily creating a cycle of high-interest debt.

Credit Card Cash Advance Cons

The biggest drawback of a credit card cash advance centers on cost and how interest charges accrue on these balances.

Unlike purchases or balance transfers, there is no grace period for a cash advance. That means interest charges start piling up from the moment you take the advance.

That wouldn't necessarily be so bad if your credit card company offers a low annual percentage rate for cash advances. But what's more common is for a credit card issuer to charge high interest rates for cash advances. For instance, your regular variable APR for purchases may be 18.99%, but you might pay 26.49% for a credit card cash advance.

Cash advance fees

Aside from the interest, credit card companies can also charge a cash advance fee. Typically, this means either a percentage of the advance amount or a flat fee, whichever is greater. For example, your credit card issuer may charge 5% of the advance amount or a $10 minimum for cash advances.

On a $2,500 cash advance, you could easily pay a fee of $125, assuming a 5% fee. If you're getting a personal loan, on the other hand, the lender may not charge any up-front fees such as a loan origination fee or application fee at all.

There may also be another fee involved if you're withdrawing cash at an ATM. The ATM's owner may tack on a surcharge for withdrawing cash if the machine doesn't belong to your bank or credit card company. This fee may only be a few dollars, but every penny counts if you're trying to borrow money at the lowest cost possible.

Bottom line: While a cash advance can be convenient, it can also be very expensive because of high rates and fee charges.

Paying Off a Credit Card Cash Advance

Credit card cash advances are short-term loans that have to be repaid like anything else you charge to your credit card.

Cash advance balances are separate from your credit card balances for purchases or balance transfers. That's important to know because of how monthly payments are allotted by your credit card company.

When you only make the minimum payment, the credit card company can apply it to any balance first, in any order. If you pay above the minimum, however, the extra amount has to be applied toward the balance with the highest interest rate - which in most cases, is likely to be your cash advance balance.

This should all be explained on your credit card bill.

If you are considering a credit card cash advance, it's helpful to think beforehand about how quickly you can pay it off to reduce interest charges. The faster you can eliminate a cash advance balance, the more money you can save on interest.

How a Cash Advance Affects Your Credit

Another thing to consider about a cash advance is the potential impact on your credit score.

Part of your credit score is based on your credit utilization, or how much credit card debt you have in relation to your credit limit. If a credit card advance results in a maxed-out credit card, that could hurt your credit utilization and your score. Keeping an eye on your credit reports can help you monitor how a cash advance is affecting your score.

When Does a Cash Advance Make Sense?

Taking a cash advance from your credit card could make sense if you need cash because you don't have an emergency fund and you don't have time to wait for a loan to be approved and funded. For example, if you're out of state when your car breaks down and the mechanic won't accept anything but cash, then a cash advance may be the quickest way to come up with the money you need.

It helps if you can pay the advance back before your next billing statement period ends to minimize interest charges. This, however, hinges on paying more than the minimums when making your monthly payments.

When evaluating credit card cash advance offers, read the fine print. Specifically, consider:

  • How much money you can receive from a cash advance
  • Your total credit limit and the potential impact on your credit-utilization ratio
  • Whether your credit card company offers a grace period for cash advances
  • Interest rates and fee charges for a cash advance
  • How quickly you can repay the advance
  • Whether you'll be able to get an advance with an existing card or whether you'll need to apply for a new credit card account

And consider the alternatives as well if you need money, whether it's related to a financial emergency or not. For example, you may be able to get a personal loan from your bank, credit union or an online lender with more favorable interest rates. Borrowing money from friends and family may also be an option, though you may want to get a written agreement in place to avoid any misunderstandings later.

Credit card cash advances can be useful in a pinch, but it's important to balance the costs and the addition to your credit card debt against the benefits. Looking at all the options can help you decide what works best for your situation when you have a financial emergency that requires cash.

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