The concept of a cash advance is simple. It’s a short-term loan that’s taken against the available balance of your credit card. Even though it’s easy to define, it doesn’t mean it’s a transaction you should make lightly. From the fees to the higher APR, a cash advance can be one of the most expensive purchases you can make. Every credit card will have different rules and fees surrounding a cash advance. Before you consider taking one out, make sure you understand the terms, so you aren’t surprised in the long run. There are three ways to take out a cash advance:

  • At a bank: You can go to your bank and request a cash advance with your credit card. You will need to present ID as proof of identity.
  • Convenience check: If you have convenience checks for your credit card, you can write a check to cash and receive your advance. You can request convenience checks from your provider if you don’t have them.
  • ATM: To take a cash advance at an ATM, you will have to set up a PIN for your credit card. You can do that by contacting the customer service department of your card issuer. Once you have a PIN number, you use your credit card much like a debit card, though you would select the “cash advance” option.

How Is a Cash Advance APR Different? Each credit card will outline its terms for cash advances. It will cover how you can take a cash advance with the card, what fees apply to the transaction, the APR, and how interest accrues. Cash advances have a separate APR from the rest of your credit card, which tends to be considerably higher. Add to that a lack of an introductory period, and it’s easy to see why cash advances are only recommended as a last resort. Since there is no grace period, the high-interest rate will start accruing from the moment you withdraw the money. So even if you pay it off before the due date, you will still pay interest in addition to what you took out.

Expected fees

Besides the interest that you pay, you’ll also be on the hook for a number of fees. Card issuers charge a cash advance fee at the time of the transaction. It’s generally 3% to 5% of the amount you want to withdraw or $10, whichever is higher. If you choose to take the money out from an ATM, there will also be an ATM fee to pay.

Paying Off Your Advance

It’s best to pay off your cash advance balance as soon as you possibly can. Think days, not months. That way, you will avoid paying a hefty chunk of interest. Your credit card purchases and cash advance balance are kept separately, which means that the payments are not applied the same way. The minimum amount required monthly is applied to your purchase balance, meaning that if you want to contribute to your cash advance balance, you have to pay more than the minimum each month. Any payment above the minimum is applied to the balance with the highest interest rate.

How does it affect your credit score?

A cash advance has an effect on your credit score, though not directly. Indirectly it can hurt your score if borrowing cash will push your credit utilization ratio above 30%. Anything above 30% means lenders may consider you a risky option. Your credit utilization ratio shows how much credit you have available. It’s the sum of all of your credit debt over your total credit line. Paying off your advance as soon as possible will help get that ratio to go down.

Alternatives Methods

According to a 2019 Bureau of Consumer Financial Protection report, the percentage of people who use cash advances have declined. Which is good news, considering how easy it is to lose money with a cash advance. To avoid accidentally racking up debt with a cash advance, consider an alternative method, which we’ve listed below. Each option listed has its pros and cons, so make sure you do your research to fully understand the terms before you make a decision.

Take out a personal loan

Depending on how much you need, taking out a personal loan may be a better option for you. Loans will generally have lower interest rates and fixed monthly payments, which makes this option somewhat limited to your credit score.

Borrow money

Asking someone personally for a loan can be an uncomfortable experience and isn’t an option for everyone. Though if you do have the opportunity, the chance of avoiding potential financial problems is worth it. Borrowing money from a friend or family member means you’ll most likely dodge fees and interest charges. Create a realistic payment plan for both parties to make sure if you are ever in a bind, you still have the option available.

Build an emergency fund

You’ve heard it countless times: have an emergency fund. As the name suggests, an emergency fund is designed to cover things that aren’t in your usual monthly budget. Building up this money is a way to safeguard yourself from having to ever use a cash advance. Monitoring both your checking account and emergency fund on a regular basis is another way to make sure you’re prepared for the future. Set up notifications through your online banking platform to ensure you’re always aware of your account dropping below the threshold you set.

Final Word

Cash advances can get you into financial trouble if you take out too much or too often. It’s best to keep your cash advances small and only use them in an emergency. Plan your repayment to make sure you don’t overpay in interest fees. That said, cash advances are there for a reason and are a source of cash if you’re in need. If you’re going to use a cash advance, make sure you understand how it works first.