Did you know that you can get a short-term cash loan from your credit card?
It’s called a cash advance.
It comes in handy when you need some cash ASAP.
Be careful though, watch those fees which can be 5% of the total and a higher APR. If it’s an emergency, the fee can be worth it.
Let’s dive in.
Understanding a Cash Advance and How it Works
All sorts of emergencies can happen. Maybe something comes up and you’re forced to pay cash without having enough money in your checking account.
Whatever the circumstances, sometimes you just need cash.
Unlike the money you withdraw from your bank account, you don’t own the money you take as a cash advance. Instead, you are using the balance from your credit limit. Even if your credit limit is high, for most people, their cash advance limit is usually capped at a few hundred dollars. You can find your credit limit and cash advance limit by looking at your monthly credit card bill.
A cash advance is borrowed, and you have to pay it back with interest. It’s like you are using your credit card to buy cash instead of a burger.
Your bank looks at a cash advance and a credit card purchase differently. If you pay your credit card bill each month on time, you usually wouldn’t be charged any interest on it. However, as a cash advance is a short-term cash loan, you will be charged interest on it from the day you borrow the cash until you pay it back.
That makes a cash advance much more expensive than just using your credit card to make a purchase. The interest adds up quickly so taking a cash advance must be your last option.
That said, it’s still better than a payday loan.
In addition to taking cash directly, buying foreign currency, gift cards, lottery tickets, making electronic transfers, and paying mortgage payments are all considered a cash advance if paid via a credit card.
Methods of Getting a Cash Advance
If you run into an emergency and need a cash advance, here’s how to get one:
At an ATM: Your credit card must have a Personal Identification Number (PIN) to get a cash advance at an ATM. If it doesn’t, you can call your bank and ask them to set one up.
If you have your PIN, you can simply go to an ATM, insert your credit card into the slot on the ATM machine and punch in the amount of cash you want. You have to agree to pay an ATM fee, which is different from the cash advance fee and interest. Once you accept it, you will get your cash right away.
You can go to any bank’s ATM for a cash advance, but I would recommend going to the bank that issued your credit card to avoid the ATM fee. In addition to the cash advance limit, many banks have a withdrawal limit per day, which may further cap the cash advance you can take using an ATM.
At a Bank: You can go to your card’s bank teller and ask for a cash advance. Remember to carry your credit card and a valid personal ID.
Your bank will likely charge a fee on top of the cash advance fee and interest.
Using a Convenience Check: You may have been mailed convenience checks along with your credit card. Their purpose is to get a cash advance easily.
Just fill out the convenience check like any regular check and deposit it at your bank to get a cash advance. In most cases, convenience checks will let you take a higher cash advance than an ATM.
Understanding The Math: What’s The Cost?
A cash advance is a terrible deal. The fees and interest are too high and I don’t recommend using them often. But let’s put that aside and assume you’re in a cash crunch. What will the total cost look like?
Here’s the breakdown of the cost:
- Cash Advance Fee: Credit card providers make a lot of money when you take a cash advance. Even though it varies across providers, most charge a flat fee between $5 and $10 or 3-5% of the cash advance amount, whichever is higher.
- Cash Advance Annual Percentage Rate (APR): The APR for a cash advance doesn’t work the same as normal credit card purchases. First, the APR for cash advances is usually higher. Second, you can’t avoid the APR by paying your card in full every month. The interest for a cash advance kicks in right away. It’s critical that you pay off the cash advance as quickly as possible.
- ATM/Bank Fee: The ATM/Bank fee can be a flat charge of $3 to $5.
- Cash Advance Balances Come Last: If you carry a normal balance on your credit card and take out a cash advance, all payments to your card reduce the normal balance BEFORE the cash advance. You have to pay off the normal balance in full before paying off the cash advance. On a card with a high balance, this could be very difficult to do.
You will find all these details in your credit card’s Schumer box (aka a document with all the “fine print” that contains the terms, fees, and interest of a credit card agreement).
Here’s how much a $500 cash advance will cost you if you take 6 months to pay it back:
Cash Advance = $500
Cash Advance Fee (5%) = $25.00
Cash Advance APR (25%) = $69.02
ATM/Bank Fee = $5
Total Charges (Interest + Fees) = $99.02
Total Amount To Be Paid Back: $599.02
So if you borrow $500 for 6 months with a cash advance with the fees above (some can even be higher!), you’ll basically pay $100 to do so. That’s a terrible deal.
Apart from the direct cost, a cash advance can affect your credit score in two ways.
Firstly, paying off a cash advance can become difficult as it is expensive. If you fail to pay or miss a payment, your credit score will take a hit.
Secondly, a cash advance could also negatively affect your credit score if it increases your credit utilization score above 30%. A credit utilization score is a ratio of the credit you have used to the credit available to you. It is one of the several factors used to calculate the credit score. A lower ratio tells lenders that you are a responsible spender and don’t depend too much on credit.
The Least Costly Cash Advance Options
Interest and fees on a cash advance are usually calculated as a percentage of the amount you borrow, so even a difference of 1% can add up to a massive amount. In that case, try to find a credit card that has a lower cash advance rate:
PenFed Credit Union – PenFed has several relatively low-cost cash advance credit cards. I recommend their PenFed Platinum Rewards Visa Signature Card and PenFed Promise Card. They don’t have a cash advance fee, and their cash advance APR is between 11.74% and 17.99%.
You can apply for a PenFed credit card if you or a family member has worked for the United States Department of Defense. You can also get one by making a one-time donation of $15 to Voices for America’s Troops, a non-profit organization.
CapED Federal Credit Union – The CapED Visa Platinum Credit Card has no cash advance fee. Its APR is between 9.45% to 17.45%. I also like that it does not have an annual fee. You can join CapED by simply donating $20 to the Idaho CapED Foundation.
American 1 Credit Union – American 1 has four credit cards that don’t charge you a cash advance fee. You can get one of them by joining Community 1 Operative after paying a $3 membership fee. I recommend their American 1 Rewards Credit Card. It charges an APR between 9.49% to 18% for both purchasing and taking a cash advance.
Most major banks charge a higher fee and an APR of about 25% for taking a cash advance. At the very least, look through all your cards and find the one with the lowest cash advance APR and fees before taking out a cash advance.
Cash Advance Alternatives
If at all possible, consider these alternatives before going with a cash advance:
- Friends and family: You should consider borrowing money from your closest folks. I know conversations about money can get awkward, embarrassing, and emotional. You’ll get the best terms from friends and family though.
- Personal Loan: If you have a good credit score, taking a personal loan can be cheaper than a cash advance. If your credit score is excellent (720-850), the interest rate will usually be between 10% to 12.5%. If it’s between average to poor, it could be anywhere between 13.5% and 32%.
- Salary Advance: Check if your employer offers a low-cost cash advance. Their interest rate can be as low as 10% but can shoot up to more than 100%. Compare it against the cost of a cash advance and make a call. You can repay the loan with automatic deductions from your salary.
- 401k Loan: Most employers let you borrow money from your own 401k account. As far as possible, do not borrow from your 401k as it can drastically reduce the funds you have at the time of retirement. The loan term is 5 years, and the loan amount is capped at 50% of the funds or $50,000, whichever is higher. The interest rate is usually around the personal loan rate.
- Roth IRA: I would not recommend taking money from your Roth IRA as it is meant for your retirement. But you are allowed to withdraw money from a Roth IRA without any tax penalties. You can withdraw the entire amount after 59½ years of age. Before that, make sure you don’t withdraw more money than how much you have contributed as it will be taxed.
Avoid Cash Advances If Possible
A cash advance is COSTLY. That’s why you should take it only in the case of an emergency and when you have no choice. Before taking one, make sure you know how much it will cost you. Only borrow the amount you can afford to pay back.
I would gladly take a cash advance before a payday loan though. Payday loan fees and interest are brutal. If those are your only two options, definitely go with the cash advance.
Just don’t make it a habit. Cash advances are a huge drag on your finances if you use them regularly.
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