How Credit Card Cash Advances Work (and Why You Should Avoid Them)
If you’re low on cash but have available credit on your card, the cash advance feature on your credit card allows you to borrow money against your credit limit. However, cash advances often come with very high fees and interest rates , making them an expensive way to borrow money.
How does a cash advance work?
With a cash advance, you’re essentially getting a short-term loan from your credit card issuer. You can receive a cash advance in several ways:
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At an ATM using your credit card and PIN.
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At the bank teller window, showing your credit card
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Using cash advance checks sent by your card issuer.
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Receiving “cash out” at the checkout when making a purchase
The amount you can receive through a cash advance is limited by your card’s cash advance limit, which is usually lower than your full credit limit.
Commissions and interest rates for cash advances
Despite the convenience, cash advances are expensive. Here are typical fees and costs:
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Cash advance fee: usually 3-5% of the cash advance amount, but not less than $10.
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Higher APR: The APR (APR) for cash advances is often 20%+ higher than the APR for purchases.
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No Grace Period: Interest begins accruing immediately, with no interest-free grace period.
For example, getting a $300 cash advance with a 24.99% APR and $15 fee means you’ll immediately owe $330 and interest will start accruing immediately.
When an advance is a bad idea
Due to exorbitant fees and interest rates, cash advances should be avoided except in emergency situations when no cheaper option exists. Alternatives such as borrowing from friends or family , taking out a bank loan , or using a credit card with a 0% APR are much cheaper.
When it might make sense
Of course, in most cases this is not practical, but in certain situations, cash advance may be the best of limited options, such as:
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Avoiding late fees/fines that are even more expensive than cash advance fees.
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You need cash urgently and have no other way to borrow money or access funds.
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Taking advantage of a temporary 0% per annum discount on cash withdrawals.
Even then, cash advances should only be used as a last resort and paid back as quickly as possible to minimize interest costs.
The high costs of cash advances mean they should be avoided whenever possible. But in a true financial emergency, when there is no better alternative, they can provide needed short-term cash, despite the painfully high cost.