A cash advance allows you to tap into your credit card’s credit line to get cash, but it comes with expensive fees and high interest rates.
A cash advance is a short-term loan taken against your card’s credit line. While it may look like an obvious choice when you need money quickly and have no other funds, it’s also an expensive kind of debt that should be avoided whenever possible.
See related: Should you use a credit card as your emergency fund?
Read on to learn how cash advances work and what other options you can use to get funds quickly.
How does a cash advance work?
How to get a cash advance from your credit card
The main appeal of cash advances is their convenience.
A cash advance allows you to get cash from your credit card like you would from your debit card account. If you have a credit card with a PIN, you can use an ATM to get a cash advance. Otherwise, you can request it from a bank that provides advances through your card’s payment network, such as Visa or Mastercard. In that case, you’ll have to show your ID.
Why are cash advances expensive?
When you take out a cash advance, you’re using the available balance on your credit card to take out a cash loan. This kind of transaction is treated differently from your regular purchases, and your credit card issuer will charge you a different interest rate.
This interest rate is typically much higher than your purchase APR and starts accruing immediately, unlike with regular purchases. Additionally, there’s no grace period when it comes to cash advances. That means interest starts accruing immediately, instead of at the end of your statement period.
See related: How do credit card APRs work?
On top of that, you might be charged costly fees.
First, your credit card issuer will most likely charge you a cash advance fee. It can be a flat fee of around $5 to $10, or a percentage of the amount advanced – for example, 5% – whichever is greater. You also might have to pay ATM or bank fees imposed by the institution handling your cash advance.
“To understand why cash advances are so expensive, take the perspective of the credit card issuer,” explains Lisa Torelli-Sauer, editor at Sensible Digs. “These companies are able to operate successfully by analyzing and predicting risk. Cash advances are usually made by consumers who find themselves in an emergency situation and have few other financial options available. This increases the chance that the consumer will have difficulty repaying the money. High rates and transaction fees can offset this risk to the credit card company.”
How a cash advance can affect your credit score
When it comes to credit reporting, a cash advance is treated the same as the rest of your credit card debt. This means that it won’t show up on your credit file as a separate item. However, it can still impact your credit.
“A cash advance can impact your score if you take out too much money,” says Howard Dvorkin, CPA and chairman of Debt.com. “The more cash you withdraw, the closer you will get to reaching your credit limit. Maxing out your line of credit or using over 30% of your credit limit can hurt your credit score.”
Since interest and fees on cash advances add up quickly, they can easily boost your credit utilization ratio, especially if the credit limit on your card is low.
“To help protect your score … see if your credit card company will increase your credit limit if you absolutely have to make a cash advance transaction,” Dvorkin suggests.
Better ways to quickly access cash
It’s understandable that needing cash while having none available can be a terrible feeling and put you under a lot of stress. In emergency situations, it might seem crucial to get funds immediately, regardless of financial and credit consequences.
However, a cash advance isn’t the only option.
According to John Simpson, CEO of RentReporters, the best advice would be to go to family members and friends first.
“If it’s a large sum, consider borrowing from multiple friends and family for smaller amounts,” he recommends. “Offer to pay a ‘fair’ interest rate to incentivize them and make sure to offer a repayment schedule as well.”
Another option to consider is a personal loan, which often offers lower interest rates than a cash advance. Even if your credit score isn’t in the best shape, it’s very likely you’ll find a personal loan with a lower interest rate than that of a cash advance.
It’s also convenient that you’ll be able to pay out the loan over time in fixed payments instead of worrying about accruing interest charges and harming your credit utilization ratio. Plus, you might be able to get a larger sum, since cash advances are often capped at a few hundred dollars.
Finally, you can simply overdraft your checking account if your bank allows it. While this is far from ideal, it might still cost you less than a cash advance. However, make sure to be careful with this approach. The average overdraft fee is $35 per transaction. Even though some banks limit these fees to four or five per day, they can add up quickly, adding well over $100 per day to your debt.
It can be extremely stressful to need cash urgently and have none. Without an emergency fund or any savings, you may feel like you barely have any options. Still, a cash advance should only be viewed as a last resort.
If you’ve considered the alternatives and come to a conclusion you don’t have any cost-effective options, make sure to calculate exactly how much a cash advance will cost you and create a plan to pay it off as fast as you can.