Although a lot of people are using credit cards as their primary form of currency nowadays, it can’t be denied that cash is still the king. And when you have a credit card, it can be easy, even tempting, to take out cash from your available limit. This is what we call credit cash advance loan.
You might need to take out a cash advance loan for a variety of reasons. You may want to purchase something or pay back someone you owe. It’s a quick and easy process, but not painless. Credit card advance loans can hurt you financially, especially if you can’t manage to pay your bill on time.
It pays to know more whether a credit card cash advance is the right and best solution for your financial situation, what the pros and cons are, and what other options you have.
What Is A Cash Advance?
A credit card cash advance is a type of loan you take against your credit card issuer. Think of it as a way to borrow money from your credit limit, by withdrawing from an ATM or bank. Apart from the fact that a cash advance comes with a ceiling, it also charges exorbitant interest rates, much higher than your typical credit card APR.
Some people may confuse credit card cash advances like payday loans. In the case of payday loans, these loans aren’t tied to a credit issuer and don’t need a credit check to be approved. A cash advance, on the other hand, requires you to have a credit card, so you need to go through a credit check in the first place.
How Does Cash Advance Work?
A credit card cash advance works by allowing you to withdraw cash from your limit through an ATM or bank. Instead of using your credit card to pay for purchases, you instead take the paper money and use it for payments. It’s like charging your line of credit as you would when you swipe your card at the store, only, the transaction is way more expensive than regular purchases.
Some people may take cash advances against their credit line when they need physical cash to pay for something or when they don’t have ample amount in their savings account. Also, those who travel abroad without enough local currency may take out cash advances from their cards to pay for their expenses.
If you’d like to take out a cash advance, you’ll likely need to have a PIN on your credit card. You can go to an ATM and withdraw the cash you need. If not, you may need to personally visit a bank, show your ID, and take the cash advance over the counter.
By the way, it is essential to remember that while your line of credit is a revolving type, there’s always a limit on how much you can take as a cash advance. Check your billing statement to see how much can borrow. Also, don’t regard a cash advance as the same as swiping a regular purchase. As it is costly, your credit could take a hit if you don’t pay it back quickly.
What Can You Use A Cash Advance For?
You can take a credit card cash advance for anything, especially in instances when you need to pay cash for a product or service. For example, if you want to buy second-hand electronics from a person, not a store, the person may only take cash as payment. If you don’t have cash handy but have adequate credit available in your account, then you may take a cash advance for it.
Or, you could use a credit card cash advance for services like emergency car repairs. Some mechanics only accept cash, and if you happen to only your credit card with you, then you have the option to take a cash advance.
Some people take cash advances for their day-to-day spending, which is never a good idea. These quick and instant money may make things more convenient in some instances, but if you get into the habit of borrowing without any justifiable reason, then it’s best to take a second look on your financial habits.
How Much Do Cash Advances Cost?
If there’s one thing a credit card holder needs to understand about cash advances, it is this: credit card cash advances are one of the costliest credit card transactions you’ll ever do. If you think your credit card interest rate is already high enough, then think of the cost of cash advances as way over the top.
But what makes a cash advance very expensive? Here’s a break down of the cost of borrowing cash advances from your credit line:
1. Flat fee or percentage
Depending on your credit issuer, your cash advance may be charged a flat fee or a percentage of the amount you borrow, whichever is greater. Typically, credit issuers charge anywhere from 2% to 10% of the borrowed amount or a flat fee of $5 or $10. Check the terms in your credit billing to see how much you’re being charged for cash advances.
2. ATM Withdrawal Fee
The typical way to take out a cash advance is by withdrawing money from your credit card via an ATM. You’ll get charged for this, often to the tune of $2 to $5 per withdrawal.
3. No grace period
In regular purchases using your credit card, you don’t get charged until after your due date. But in the case of cash advances, you don’t get such grace period. The charge applies as soon as the advanced amount leaves your account. Therefore, it is essential to pay your bill in time and in full, even if you don’t get your credit card statement yet to avoid interest from further inflating your debt.
4. Higher interest
The APR applied on cash advances are more expensive than APR charged on your regular purchases. Add to that the fact that the already costly APR applies as soon as you make the cash advance, not when the grace period applies.
Given the very high cost of credit card cash advances, it is essential to remember that even when you only intend to borrow a small amount to cover a cash emergency, you’ll have to pay a very higher price for it. And the more you delay paying off the debt, the more interest accrues, therefore leading you to deeper debt.
Pros of Cash Advances
It’s a quick way to get cash
When you are short with cash, and you need to pay with paper money immediately, a credit card cash advance could come in handy. You can just go to the nearest ATM and withdraw the cash you need (as long as it’s within the credit issuer’s cash advance limit). Credit card cash advances are particularly helpful when you need to pay something, but you don’t have enough money on your savings or checking account.
Cons of Cash Advances
It’s an expensive way to get cash
After computing how much the high APR, cash advance, and ATM fees cost you, cash advances from your credit card isn’t always the most practical solution for financial emergencies.
It can get you into deeper financial trouble
If you take a cash advance once and struggle to pay it back on time, you’ll find your debt ballooning before your very eyes. And apart from the debt, taking out a credit card cash advances raises your rate of credit utilization and negatively impact your credit score.
There’s no grace period
In most cases, you get some time to settle your credit card bill for usual purchases before interest applies to your debt. But the same can’t be said for credit card cash advances. The interest applies on the very day you took the cash, and it keeps compounding until you’ve settled it in full.
What to Consider When Taking Our Credit Card Cash Advances
You might find yourself contemplating whether it’s a good idea to take a cash advance from your credit card at some point. However, before you head to the nearest ATM and withdraw cash, it helps to keep these considerations in mind:
Can you pay it back right away?
Credit card cash advances have some of the steepest charges, and if you can’t pay it back as soon as you can, the debt can inflate exponentially. Also remember that unlike regular credit charges where a grace period applies before interest is imposed, cash advances carry high interest since day one you took the cash out. Paying the bill in full and on time is the only best way to keep interest from creeping into your debt.
What are your other options?
Given that credit card cash advances are very expensive, it’s essential to tap them only in dire emergency cases. Try to explore other ways to raise cash before considering cash advances.
Do you need to buy it?
It’s also essential to draw a clear line between your needs and wants so you can better decide whether your situation warrants a cash advance. For instance, getting your car fixed is a need, especially if it’s your main source of transport from home to work. But do you really need a new fancy watch or the latest smartphone? Maybe you’re better off saving up for them instead of dipping into a credit card cash advance.
How do you manage your money?
If you habitually take out credit card advances, then it’s probably a matter of poor financial management and not a financial emergency. Take a long, hard look at your financial habits and check whether you’re spending lifestyle. If you’re always in debt, perhaps there’s something amiss with the way you manage your money. Consider making a budget and saving money for different financial goals, so you don’t always end up in debt.
How Lenders Make Money on Cash Advances
Lenders make money from cash advances by charging your exorbitant fees each time you withdraw money from your credit account. Credit issuers treat cash advances differently from your usual purchases, and they tend to charge more for “convenience” of being able to get cash quickly.
Once you’ve taken out a cash advance, your bill inflates in several layers. First, you’ll get charged with high interest since the first day you take out the cash advance. The principal cash advance is also charged with both a transaction fee and ATM fee.
Second, your interest compounds as you delay paying the cash advance. This means that your bill inflates significantly over time, and it will keep hurting until you’ve settled your bill in full.
Alternatives to Cash Advances
Credit card cash advances should never be your first resort when it comes to financial emergencies. There are several other better options out there that have friendlier terms and lesser costs of borrowing.
Tap your emergency fund
If you’re in a dire need for cash to address a financial emergency, tap into your emergency fund first. The emergency fund is your first bet in wriggling your way out of a financial dilemma without sacrificing other parts of your budget. If you don’t have an emergency fund, now is the time to start saving up for one. Aim to put at least three months’ worth of monthly expenses into the fund and keep building it up, little by little, until you’ve had enough that you can be comfortable with.
Take out a personal loan
A personal loan is available from banks, third-party lenders, and credit unions. These loans are often unsecured, so it’s easy to obtain them even without collateral. Additionally, personal loans have fixed loan terms and interest rates, and you can borrow a few hundred dollars to a few thousand that you can pay back in a matter of months or years. What’s great about personal loans is that they have lower interest rates that credit card cash advances and payday loans, although you do need to have at least decent credit to qualify.
Take a loan from family and friends
Your loved ones can be a great source of emergency funding, especially if you have close relationships with them. They may be the first people to give you a helping hand when you need one. However, you want to approach this method cautiously so as not to strain your relationship with them. Make sure to borrow only what you need and what you can afford, and put it into writing.
Obtain cash through other methods
Perhaps you could take a second job to raise the money you need, or take some side gigs that you can do in your free time. Or, consider selling some of your stuff to raise the money you need. What’s good about selling or working a second job is that you don’t need to borrow money from your credit line or other people — all you need is to put in the time and effort.
To some people, taking a cash advance against their credit line is the easiest and breeziest way to cure a rough financial patch, but it also comes with a cost. It is essential to take a cash advance only when you need it the most and if you’ve explored all the other low-cost options you have. Cash advances shouldn’t be your first line of defense for financial woes.
But if you believe that a cash advance is an ultimate solution, make sure to have weighed your options carefully and do your research diligently. Look at the bigger picture of the financial situation to see where payments for cash advances figure out. Ideally, you should only take what you need and never treat it as “extra money.” And lastly, strive to pay the cash advance as soon as you can to get yourself back on the right financial track.