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Fast access to cash can be a lifeline when facing a financial emergency or unexpected expense. There are a few ways you can get cash quickly if you’re short on funds — one of them being a cash advance from a credit card, which lets you use your card to get a short-term cash loan at a bank or ATM.
But you should be careful: Credit card cash advances are very expensive.
You’re borrowing against your credit limit to put cash in your pocket, at an interest rate usually higher than on regular credit card purchases. And you’ll typically have to pay a transaction fee too.
“I suspect it happens mostly at times of emergencies, or it’s just a very poor choice by an inexperienced consumer,” says Mike Sullivan, a personal financial consultant with Take Charge America, a national nonprofit credit counseling and debt management agency.
“But it’s almost always a bad decision.”
The best way to avoid falling into more debt is knowing exactly what you’re signing up for. Here’s everything you should consider before taking out a cash advance.
How Does a Credit Card Cash Advance Work?
A credit card cash advance is similar to withdrawing cash from an ATM with your debit card, except the cash comes from your credit card instead of your checking account — and you have to pay it back.
“It’s technically a loan,” says Todd Christensen, financial counselor and education manager with the nonprofit debt relief agency Money Fit by DRS. “You are taking out money that you’ll have to pay back with a high interest rate, typically 25% to 30%, with no grace period.”
The process to get a credit card cash advance is straightforward. You can enter your credit card PIN at an ATM — this is different from your debit card’s PIN — or use a convenience check mailed by your credit card issuer to withdraw cash at a bank. There are limits on the amount you can withdraw, typically anywhere between 10% and 40% of your total credit limit.
If you have no other option but to take a cash advance from your credit card, you can minimize accruing interest by paying the balance as quickly as possible
Unlike a payday loan, this type of advance is tied to your credit card, and you can pay it back over an indefinite period of time, as long as you make minimum payments. However, making only minimum payments will cost you money over time since the interest rate for credit card cash advances is so high.
The Costs of a Credit Card Cash Advance
Before you move forward with a credit card cash advance, there are several costs to take into account:
- Interest charges: When you take out a cash advance, the bank will add interest to the amount you withdraw. Typically, the interest begins accruing immediately. The average interest rate for a cash advance is almost 25%, according to recent data from CreditCards.com.
- Cash advance fees: This is the fee you’re required to pay for withdrawing cash from your credit card. It’s usually 5% of the transaction or $10, whichever is greater.
- ATM fees: These fees can vary. They could vary between $2.50 and $5 or more, depending on what ATM you use. It won’t cost you anything if you use your bank’s ATMs. But any transaction made with an out-of-network ATM will usually trigger fees.
Let’s say you withdraw $200 from an ATM using your credit card. Right off the bat, you’ll pay a $10 cash advance fee (5% of $200). You might also have to pay an ATM fee, so it could cost up to $15 to simply get the cash advance. And you’ll begin accruing interest immediately at, let’s say, 24%. If you don’t pay your bill until the first statement after your withdrawal arrives, you’ll owe roughly $48 in interest.
Paying Off a Cash Advance Balance
If you’re already struggling with credit card debt, a cash advance can put you in a deeper hole.
Say you have a balance of $2,000 on your credit card, and your card is charging an interest rate of 18%. Then, you decide to take out a $300 cash advance, which may come with 25% interest .
Minimum payments typically apply to the balance with the lowest interest rate (in this case, your previous $2,000 balance). So, if you only pay the minimum, your cash advance debt could quickly balloon. It could take months or years to pay off. You’ll also spend a lot on fees and interest.
That’s why it’s critical to read your credit card agreement before you do a cash advance. If you decide to take out a cash advance, take out only what you need and pay it off as quickly as possible.
Alternatives To Credit Card Cash Advances
If you find yourself considering a cash advance, it’s likely a sign of a bigger financial problem. It may be time to align your budgeting and spending habits.
Sullivan says people who take out cash advances are more likely to default on their credit card debt, which is partly the reason why interest rates on cash advances are so high.
You can avoid the need for a credit card cash advance in the first place by planning ahead. It’s best practice to regularly contribute part of your income to an emergency fund, in case you’re faced with any unexpected expenses.
“If your credit is good enough that you have a lot of available credit and you can get a cash advance from your card, then you probably have better options or can access some other form of borrowing that’s going to cost you a lot less,” Sullivan says.
Work With Your Credit Card Issuer
For many people, credit cards can be a source of relief when money gets tight. But credit card debt can also add up quickly and lead to long-term financial problems. If you’re struggling to pay your credit card bill, contact your issuer as soon as possible to discuss your options.
During the coronavirus pandemic, many credit card issuers have been more open to agreeing to flexible payment arrangements, such as deferral of minimum payments, waived late fees, and credit line increases. This can help free up cash for other necessities.
There are also credit card payment plans that may be available on one of your cards. For example, major issuers like American Express, Chase and Citi offer these more flexible financing options on existing credit lines. Some of the perks are lower interest rates and more clearly defined repayment schedules.
Consider a Personal Loan
If you have good credit, getting a personal loan from a bank or a credit union is likely cheaper than a credit card cash advance. Interest rates at credit unions tend to be lower. Research your options and consider talking to a representative to see which personal loan would be best for your financial situation.
Borrow From Friends, Family, or Yourself
It may feel awkward asking relatives or friends or a free or low-interest short-term loan — but it could save you a lot of money in the long run. Know that it’s okay to ask for help, as long as you’re honest about your situation. If you’re not keen on the idea of borrowing from friends or family, you could also look at potentially borrowing from yourself through your 401(k) plan. Under the CARES Act, taking out a 401(k) and paying it back on time isn’t the worst option if it’s done for the right reasons.