Credit card issuers offer cash advances as a way to tap into your available credit for money you can spend for in-person transactions. Even though it sounds like a convenient way to get access to cash, taking out a cash advance on your credit card is risky, expensive, and carries the potential for debt if you don't quickly repay the advance amount. Knowing that before you swipe your credit card at the ATM may help you make better decisions about the way you use a credit card cash advance - if you use one at all.
Costs of a Cash Advance
Unlike purchase transactions, cash advances aren't free. A cash advance comes with an additional cash advance fee that posts to your account the day you complete the transaction. Cash advance fees differ among credit card issuers but are typically around 5% of the advance with a minimum of $10 on cards from major credit card issuers.
The fee isn't the only cost of taking out a cash advance on your credit card. Cash advances have higher interest rates than regular purchases and even balance transfers. And since most credit cards don't provide a grace period for cash advances, interest starts accruing as soon as you take the cash from the ATM.
If you use an ATM that's not in your credit card issuer's network, you may pay an additional ATM charge on top of the cash advance fee.
Those costs can make cash advances extremely expensive. Even so, cash advances can be less expensive than some alternatives, like payday loans. Managing cash advances fee is key if you're in a situation with no other options.
Smart Ways to Handle a Cash Advance
While credit card cash advances are generally a bad idea, there may be a time that you need access to cash and have no better options. If you must take a cash advance on your credit card, follow these tips to lower the cost and risk of getting into debt.
Read your credit card agreement to understand the terms and fees. You need to know the one-time cash advance fee you'll pay and the APR that will be applied to your cash advance balance. If you don't understand something, call a customer service representative and ask.
Use a cash advance for true emergencies that you can't pay for with your credit card. Avoid taking out a cash advance to pay for ordinary everyday items like groceries and gas. Make a goal to build an emergency fund so you don't have to rely on a cash advance in the future.
Know your cash advance limit; it's probably less than your credit limit. You can check your limit on your online credit card account or by calling the automated customer service number on the back of your credit card. Exceeding your cash advance limit can result in over the limit charges and higher interest rates.
Take out only what you need, nothing more. Avoid the temptation to withdraw just a little more so you have some extra money. Remember, you're paying a fee based on the amount of the advance. That little extra will only make it harder to repay the advance. Try to avoid taking out multiple cash advances by making sure the one cash advance you do take is large enough to cover your expenses to avoid additional fees.
Use a credit card with a zero balance. If you have multiple types of balances on a credit card—purchases, cash advance, balance transfer—any payment above the minimum goes to the higher rate balance. Meanwhile, the other balance, e.g. purchases, doesn't decline and instead accumulates interest. This makes it harder to repay the cash advance balance.
Taking out a cash advance could cause you to lose any promotional rate that currently applies to your purchases or balance transfers. You'll have to pay your entire balance in full or you'll be charged interest.
Avoid purchases until the cash advance is repaid, for the same reason discussed above. You should also avoid making credit card purchases until you can afford a credit card balance.
Cash Advance Alternatives
The need for quick cash is often a symptom of a larger money management problem, like overspending or the absence of an emergency fund. In cases like these, repaying a cash advance could take a long time and cost a lot of money.
Before you decide to take out a cash advance, here are a few less expensive alternatives to consider:
- Small loan from your bank, credit union, family member, or friend
- Payday advance from your employer
- Due date extension from your creditors
- Consumer credit counseling
- Local emergency hardship programs (typically offered by your local human resource department)
Cash Advance-Proof Your Finances
Because of the high costs involved with taking out a cash advance, plan to avoid it altogether. Start by building an emergency fund. Contribute as much as you can toward savings until you've built a sizable emergency fund. Adjust your spending habits to eliminate debt and get your finances back on track. Finally, minimize your credit card debt by charging only what you can afford.