Introduction
A cash advance is a short-term loan taken out against your credit card balance, allowing you to access funds quickly in an emergency. Though convenient, cash advances come with high interest rates and fees and should only be used as a last resort. It is important to understand how cash advances work with credit cards and the potential implications before taking out a cash advance.
Explaining the Basics of How Cash Advances Work with Credit Cards
Withdrawing a cash advance from your credit card is similar to withdrawing money from an ATM. You can either use your credit card at an ATM or visit a bank or credit union to take out a cash advance. The amount you can withdraw will depend on your available credit limit, though some banks may have a lower maximum withdrawal limit. Not all credit cards offer cash advances, so it is important to check with your credit card issuer to see if this is an option.
According to the Federal Reserve, “Typically, you can take out a cash advance up to the amount of your available credit, less any fees charged by the card issuer. For example, if your credit limit is $1,000 and you’ve already used $200 of it, you may be able to take out a cash advance of up to $800.”1
The Pros and Cons of Using a Cash Advance with a Credit Card
Pros
One of the major benefits of taking out a cash advance with a credit card is that it can be done quickly and conveniently. This can be helpful in an emergency situation when you need to access funds quickly. Additionally, depending on the type of credit card you have, there may be no fee associated with taking out a cash advance. For example, many rewards credit cards waive the cash advance fee, which can make this a more attractive option than other types of loans.
Cons
Though convenient, cash advances come with significant drawbacks. One of the biggest drawbacks is the high interest rates associated with cash advances. According to Experian, “Most credit cards charge an APR (annual percentage rate) of around 25% for cash advances. That’s 5–10 points higher than the typical APR for regular purchases.”2 Additionally, there are often fees associated with taking out a cash advance, including a transaction fee and a cash advance fee. There may also be limits on the amount you can take out as a cash advance, making it difficult to borrow large amounts of money.
Understanding Interest Rates and Fees Associated with Cash Advances
Interest Rates
As mentioned above, cash advances typically come with significantly higher interest rates than regular purchases. According to U.S. News & World Report, “Cash advances tend to have higher interest rates than purchases. Your credit card’s APR for cash advances is listed in its terms and conditions, and is usually higher than the APR for purchases. A cash advance APR can range from 18% to 25%, while purchase APRs range from 12% to 20%.”3 It is important to note that cash advances begin accruing interest immediately, meaning you will start paying interest on the loan right away.
Fees
In addition to the higher interest rates, cash advances also come with additional fees. Most credit card issuers charge a transaction fee for cash advances, which is usually around 3–5% of the total amount withdrawn. Additionally, many credit card issuers charge a cash advance fee, which is typically around 5% of the amount withdrawn. Finally, some credit card issuers charge an annual fee for taking out a cash advance, which can add to the overall cost of the loan.
Other Costs Associated with Taking Out a Cash Advance
It is important to consider the full cost of a cash advance when deciding whether or not to take one out. In addition to the fees and interest rates discussed above, there may be other costs associated with taking out a cash advance. For example, you may have to pay ATM fees to withdraw money from an ATM, and you may also have to pay service fees at the bank or credit union if you choose to take out a cash advance in person. Additionally, there may be additional fees associated with paying back the loan, such as late fees or penalty fees.
Exploring Alternatives to Cash Advances with Credit Cards
Before deciding to take out a cash advance with a credit card, it is important to explore other options. Balance transfers, personal loans, and payday loans are three alternatives that may be worth considering. Balance transfers allow you to move debt from one credit card to another, potentially saving you money on interest. Personal loans can provide access to larger amounts of money than a cash advance, and they typically have lower interest rates. Payday loans are a short-term loan option that can provide quick access to funds, but they also come with high interest rates and fees.
Tips for Safely Using Cash Advances with Credit Cards
If you decide to take out a cash advance with a credit card, there are a few steps you can take to ensure you use the loan safely. First, only use a cash advance when absolutely necessary. This should be reserved for emergency situations when you need access to funds quickly. Second, shop around for the best interest rate. Different credit card issuers may have different interest rates for cash advances, so it is important to compare rates before taking out a loan. Third, understand all fees associated with the cash advance. Make sure you are aware of all applicable fees before taking out the loan. Finally, pay off the balance as quickly as possible. The sooner you pay off the loan, the less you will have to pay in interest and fees.
Examining How Cash Advances Impact Credit Scores
Taking out a cash advance can have both short-term and long-term impacts on your credit score. In the short term, taking out a cash advance can cause your credit utilization ratio to increase, resulting in a temporary decrease in your credit score. In the long term, if you do not pay off the loan in full and on time, it could negatively impact your credit score. To minimize the impact on your credit score, it is important to pay off the loan as quickly as possible and to keep your credit utilization ratio low.
Conclusion
Cash advances can be a convenient way to access funds quickly, but it is important to understand the associated costs and risks before taking out a loan. Cash advances come with high interest rates and fees, and they can have a negative impact on your credit score. Alternatives such as balance transfers, personal loans, and payday loans may be worth considering. When using a cash advance, make sure to shop around for the best interest rate, understand all fees associated with the loan, and pay off the balance as quickly as possible.
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