Consumer Comeback Blog

Credit Card Cash Advances: Why You Should Avoid Them

Written by Jeffrey Trull

cash-advanceCredit card cash advances are one of most expensive ways for consumers to borrow money, and it’s almost impossible for me to recommend taking one no matter the situation. But for those who need money fast with nowhere else to turn, it’s not hard to see why some credit card users rely on them.

Here’s information you should know before taking a cash advance, including why and when you’ll want to avoid them.

What’s a cash advance?

A cash advance is when you use your credit card account to withdraw money against a line of credit. This is typically done in two ways: by using your credit card at an ATM, or by going to a bank branch and cashing a “convenience check,” which you’ll sometimes receive in the mail from your credit card issuer.

However, taking a cash advance is much different than withdrawing funds from your bank account or making a purchase with your credit card.

Fees just for taking one

Most cash advances charge an upfront fee to withdraw money. This fee can be a percentage of your withdrawal, often 3% to 5%, typically with a minimum charge of $10.

If you use an ATM, you may also get hit for another fee of up to $6.

High interest, starting immediately

What isn’t so obvious is that unlike credit card purchases, interest from cash advances starts accruing right away. There’s no grace period, even if you pay the entire amount off when your bill is due.

The second interest disadvantage is that interest rates for cash advances are often higher than the purchase APR on your credit card, with some rates exceeding 20%.

What really matters isn’t the math, it’s the true cost you pay. Here’s an example of how interest is charged:

You take out a $1,000 cash advance from your credit card on the first day of the month. You immediately pay a 3% fee of $30 just for taking this loan.

Let’s say the cash advance APR is 24.99%. If you pay off the loan 30 days later, you’ll pay about $21 in interest.

The total for cost for borrowing this money: $51. That’s just for one month, and subsequent months can cost more if your principal balance continues to rise.

Lower cash advance limits

Beware: You might not be able to take out a cash advance up to your full line of credit. Banks often set cash advance limits lower since this is even a risker form of lending than just letting you charge purchases to a credit card.

Check your cash advance limit first to find out what you can withdraw before your request is denied or you’re hit with a fee for violating the terms of your credit card agreement.

When to consider a cash advance

Cash advances are almost never a good deal, but sometimes you might not have the luxury to be choosey when you’re desperate for cash. Before you take out a cash advance, ask yourself:

  • Are you certain you can pay it back soon? Cash advances are expensive. In the example above, interest comes to about $21 a month and will continue to grow from there if you let the balance continue to accrue interest charges. Paying back a cash advance within a week or a month might not be so harmful, but getting into a cycle of debt with high interest can be damaging and unmanageable.
  • Do you have access to emergency money? Many financial professionals encourage the use of an emergency fund, and avoiding bad deals like cash advances is a big reason why. If you’ve created a dedicated fund, can you use that money first? If not, and it’s a real emergency, take the cash advance this time. Work on building your emergency fund as soon as the advance is repaid, and make sure you have money easily accessible for next time.
  • Do you need this money? If it’s not an emergency, why are you taking a cash advance? Consider saving the money first rather than financing whatever you’re going to buy. Even making the purchase using your credit card will probably be a better deal. If you’re already maxed out on plastic, you’ve probably got bigger problems to consider.
  • Do you have bigger financial problems? Going for a cash advance might be the sign that you have significant financial problems. Why are you resorting to this bad option as a source of cash? Look at your financial situation beyond this cash advance instance, and get back to the basics like making a budget and coming up with a plan to pay off your debt.

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