SAN JOSE, CA., November 9, 2021 /PRNewswire/ — Being able to use your credit card to withdraw cash might sound pretty convenient. And that can be especially the case if you have an upcoming expense that can’t be paid for with a card.
However, it is important to understand that credit card cash advances work differently than regular purchases on a credit card. In fact, a cash advance can be one of the most expensive ways to access emergency cash.
How does a credit card cash advance work? And are there any situations where taking out a cash advance might make financial sense? Let’s examine their potential risks and benefits below, from myFICO.
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What is a credit card cash advance?
Let’s say you come home from work one day and notice that your air conditioning isn’t working. You call a local repairman who quickly identifies the problem as a relatively minor problem that can be fixed for $300. You’re relieved that you don’t have to replace your entire AC unit. But much to your dismay, the repairer informs you that he only accepts payment in cash or by check.
You currently do not have $300 available in your checking account, and it will take you another three days to receive your next paycheque. You intended to use your credit card to pay for the repair because your current balance is well below your credit limit. But unlike most debit cards, credit cards do not provide access to cash. Or do they?
You call your credit card company, explain the situation, and the customer service representative says he has good news. Your credit card comes with a “convenient” cash advance feature. You can simply go to your bank or a supported ATM near you and use your credit card to make a cash withdrawal. It’s that simple!
It turns out that many credit cards do allow you to borrow cold, ringing cash against your credit limit in this manner. But the price you pay for this added convenience can be a tough pill to swallow. Let’s look at some of the fine print you’ll want to pay attention to before deciding to take out a credit card cash advance.
What cash advance fine print should you read?
A credit card cash advance will almost always be more expensive than using your card to spend the same amount in-store or online. One of the reasons for this is that cash advances usually start earning interest immediately while interest charges generally only trigger on purchase transactions after a grace period.
But precisely How many you pay for a credit card cash advance will vary depending on the fine print of the specific credit card you have. Here are the top three factors that can affect the cost of cash advances:
- Interest rate (APR): In most cases, the APR of a cash advance will be higher than the standard APR of your card.
- Cash advance fees: Most credit card issuers charge transaction fees on cash advances. This fee can be a percentage of the amount advanced, often ranging from 3% to 5%. Or it can be a flat rate, often between $5–$10. Yet other cards use a combination of these two fee structures. For example, cardholders may be charged for bigger 5% or $10 for their cash advance transactions.
- 3rd party ATM or bank charges: In addition to your card company’s fees, you can expect the third-party bank or ATM provider to also charge transaction fees. You can check the out-of-network ATM fees of a few banks and ATM providers online to find the cheapest option.
Cash advance fees and third-party fees are easier to calculate because they are only charged once. But the amount you pay in interest on the money you borrow will depend on how long it takes you to pay off the balance. The sooner you can repay your advance, the less interest you will pay.
The last piece of fine print you’ll want to look at is your Credit limit because your cash advance line may be less than your overall credit limit. If you only need enough money to buy produce at a local farmer’s market, the lower limit shouldn’t be a problem. But if you’re trying to pay for a car repair, for example, you’ll want to check that you can withdraw enough money to cover the entire expense.
Are there better ways to borrow money?
A credit card cash advance can actually be a more cost effective emergency cash option than payday loanswhich often charge an upfront fee that equivalent to APRs of nearly 400%. A cash advance may also be more accessible to those whose credit has recently been damaged than a personal loan application, as it does not require a new credit check.
However, there may be other ways to borrow money that are more flexible and less expensive. An example is This program which allows eligible cardholders to borrow against their credit limit at a lower interest rate than the card’s standard APR for purchases. These loans do not require a new credit check, are free of charge and the money is deposited directly into your bank account. However, the minimum loan amount is rather high at $500.
Want to use a peer-to-peer payment app to send money to a friend or business owner, but don’t have enough money in your bank account to cover the transaction? With this product, you can use your credit card to make Venmo or PayPal payments without having to pay standard credit card fees. A linked bank account is not required and transactions are treated as purchases rather than cash advances.
Finally, you can consider using a third-party payment service. With Plastic, for example, you can pay for virtually any expense with a credit card (even things like utilities or rent) and your recipients get paid the way they prefer (ACH, paper check, or wire transfer ). Plastiq’s 2.85% fee is lower than most credit card cash advance fees. And since their transactions are generally treated as purchases, you should receive the standard APR and grace period for your card.
A credit card cash advance can be an expensive way to borrow money. Even so, a cash advance might be worth considering if it helps you avoid predatory borrowing options like payday loans and if you’re confident you’ll be able to repay the borrowed amount quickly.
But most cardholders will have better options available to them to use their credit card to cover cash-only expenses. However, it is important to note that even the best of these options will still involve the payment of interest if your card statement balance is not paid in full by the due date.
Ultimately, the best way to avoid interest and fees on expenses that require cash payments is to build up reserves in your bank account. Discover our Guide to creating an emergency fund to find tips that will help you reach your savings goals faster.
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