Quick Overview
A cash advance is a short-term loan provided by your credit card issuer, offering a fast way to get cash. However, the convenience comes at a high cost due to fees and steep interest rates.
What Is a Cash Advance?
A cash advance allows you to borrow money against your credit card limit. While it’s a quick way to access funds without needing to apply for new credit, the associated costs can make it an expensive option. Let’s delve into how cash advances function.
How Does a Cash Advance Work?
Credit cards typically allow you to withdraw a certain amount of cash up to your cash advance limit, which is often lower than your total credit limit. You can find this limit on your credit card statement or by contacting your card issuer.
When you take a cash advance, the amount is added to your credit card balance and starts accruing interest immediately. The annual percentage rate (APR) for cash advances is usually higher than the APR for regular purchases and does not have a grace period.
Here are common methods to get a cash advance:
- ATM Withdrawal: Insert your credit card into an ATM, enter your PIN, and follow the prompts to withdraw cash. Note that ATM fees may apply if you’re not using your bank’s ATM.
- Bank or Credit Union: You can visit a participating bank and request a cash advance from a teller. Ensure you have your credit card and a valid ID.
- Online Transfer: Some banks allow cash advances through online banking or mobile apps. Transfer funds from your credit card to your checking account.
- Convenience Check: Use checks provided by your card issuer to withdraw cash or make deposits. Write the check to yourself, endorse it, and cash it at your bank.
Certain transactions might also be treated as cash advances, including purchasing lottery tickets, gambling, foreign currency, money orders, and person-to-person money transfers. These transactions will incur the cash advance fee and interest rate.
What Are Cash Advance Fees?
Cash advances come with significant costs. Here are the typical fees:
- Cash Advance APR: Higher interest rate compared to regular purchases.
- Cash Advance Fee: Either a flat fee or a percentage of the cash advance amount, whichever is higher.
- ATM Fee: Charged for using an ATM outside your bank’s network.
Example of Cash Advance Costs
For instance, if you take a $500 cash advance, with a 5% fee or a minimum of $10, the fee would be $25. With a 29% APR, repaying the amount in one month would cost you $12.69 in interest, totaling $537.69. If you repay $50 per month, the total cost would be $112.98 over a year.
Pros and Cons of Cash Advances
Pros:
- Immediate Cash: Useful in emergencies when credit cards aren’t an option.
- No Credit Check: Uses existing credit lines, avoiding new credit inquiries.
Cons:
- Immediate Interest Accrual: Interest starts accruing right away with no grace period.
- High Fees and APR: Makes it an expensive borrowing option.
- Potential Credit Impact: Increased credit utilization can lower your credit score.
Impact on Credit Score
While cash advances don’t directly show up on your credit report, they increase your credit card balance, potentially raising your credit utilization ratio. A higher utilization ratio can negatively impact your credit score, especially if it exceeds 30%. Additionally, struggling to repay the high-interest debt can affect your ability to keep up with other payments, further harming your credit score.Q