What is a cash advance?
Don’t get a cash advance.
In almost any situation, you have better options. Negotiate late fees with your landlord. Call your cell phone or cable provider to discuss deferred payment options. Always keep a debit card in your wallet.
But don’t get cash advance. Here’s why.
What is a cash advance?
A cash advance is a feature offered by most credit cards. It allows you to get money from an ATM or bank just like you would with a debit card. Instead of withdrawing money from a bank account, it comes from your credit card. A cash advance counts and is limited by your total credit limit.
Depending on how your account is set up, you can sometimes withdraw money directly from an ATM. Otherwise, you will probably have to go to a bank teller for the transaction. Either way, you are (essentially) buying cash with your credit card.
Typically, you will receive a cash advance directly in hard currency, although sometimes, depending on why you need it, you can deposit that money into a checking account. People typically use a cash advance in one of two situations:
They would like to make a purchase from someone who does not accept cards, such as a small store, an outside vendor, or in many foreign countries.
They have to pay an invoice and can only do so in cash, for example from a landlord or contractor.
Typically, your credit card will have a limit on how much you can withdraw from a cash advance. Most of the time, that’s a fraction of your overall credit limit or even a few hundred dollars.
How much do cash advances cost?
Credit card companies charge you high fees for a cash advance.
Credit card companies charge much higher interest rates on a cash advance than on regular purchases, and that interest usually starts accruing immediately. When the average credit card purchase interest rate is 15.96%, the average interest on a cash advance is 23.68%.
In addition, a cash advance usually comes with an upfront fee. These will include bank charges and ATM fees charged by the remitting institution. In addition, your credit card company will also charge an upfront fee. These fees can be a fixed amount or a percentage of the cash issued, depending on the card.
Finally, by law, your credit card company must apply your minimum payment each month to the loan with the highest interest rate, so that this amount will go towards your cash advance. However, the law allows them to transfer all payments above the minimum to other sections of the debt. Any payment you make above the minimum probably won’t go toward your super high interest cash advance until you pay off the rest of your credit card debt.
Negatives of getting a cash advance
Don’t take out a cash advance if you have alternatives. We cannot stress this enough.
- First, a cash advance is extremely expensive. Between interest and fees, you’ll pay more for that money than you would by making a credit card purchase or taking out almost any other form of short-term loan.
- Second, there are very few circumstances where you will actually need a cash advance. Most businesses have switched to electronic payment. Very few will not accept direct payment from your credit card, and to get a cash advance you will need to have that much credit available in your account anyway. If you live in a rural community and the nearest store doesn’t accept credit cards, it may mean driving further, but the inconvenience will be worth the money you saved.
- Third, you probably have better options, including: short-term loans from a bank, peer-to-peer loans online, or a payday advance. All of these products offer better terms than taking out a cash advance. You will probably even pay less by accepting overdraft fees from your bank.
- Fourth, you can pay most late bills. This is not a good option, as utilities, rent, and any other bills will all charge fees and may even flag a late payment on your credit report. However, almost all bills will charge less for a late payment than your credit card company will charge for a cash advance.
When should you make a cash advance?
It is extremely rare for a cash advance to be useful, increasingly because (as noted above) the world has passed the money stage. Most people actually only need cash to pay their monthly rent or mortgage, and few credit cards have a limit high enough to cover these kinds of expenses.
However, a cash advance is a smart alternative to a payday loan.
Payday loans are an obviously predatory financial product that charges some of the highest interest rates in the market. Typically, this is the most expensive form of loan available to a consumer. If you really need cash and can’t shop directly on your credit card, a cash advance is better than a personal loan.
This is the lowest bar that a financial product can aspire to.