When you’re low on cash but need cash right away, getting a cash advance on your credit card is a quick and convenient way to get the cash you need. Unfortunately, a cash advance comes at a high cost.
Before using your credit card for a cash advance, it’s helpful to know the steps you can take to minimize the cost of a cash advance.
How do cash advances work?
A cash advance is essentially a cash loan on your credit card, with a maximum amount equal to your available credit. You may only be able to borrow up to your card’s cash advance limit, which will vary by issuer. For the exact interest rate on cash advances on your card, call your issuer or see the terms and conditions in the Schumer Box.
Typically, you get a cash advance from an ATM or through a bank that works with your credit card’s payment network (Visa, Mastercard, American Express, or Discover). When you take out a cash advance, the amount will be added to your balance and it will start earning interest from the start.
Why cash advances are expensive
Although it’s easy to get a cash advance, it’s also quite expensive. Consider these factors that drive up the cost of a cash advance:
Regardless of how you purchase a cash advance, you will incur transaction fees, typically 3-5%. Currently, the transaction fee for the Chase Sapphire Preferred® card is 5% or $10, whichever is greater. This means that if you take out a $300 cash advance, the transaction fee will cost you $15. Incidentally, the transaction fees are identical for three other major credit cards:
The APR for credit card cash advances tends to be considerably higher than the APR for regular purchases.
Consider this: the current average credit card interest rate hovers around 16%. While your card’s APR for regular purchases may be higher or lower, one thing is certain: the Average cash advance APR of 24.80% is considerably higher.
Before getting a cash advance, do your due diligence and analyze the numbers to understand your true cost.
No grace period
Many responsible cardholders are surprised to learn that credit card companies don’t provide a grace period for cash advances like they do for regular purchases. Instead, interest begins to mount the moment you take out a cash advance.
How to get a cash advance from a credit card
To set up the cash advance option on your credit card, call your card issuer’s customer service department and obtain a PIN. You can then go to an ATM and use your card and PIN, just like a debit card, to withdraw cash. The only difference at the ATM is that you will select the cash advance option rather than choosing your savings or checking account. You will then enter the amount of cash you wish to withdraw.
Of course, you won’t be able to access more than your available line of credit. In fact, credit card companies usually limit your daily cash advance amount to a few hundred dollars. In other words, if you need more than a few hundred dollars for an emergency, a cash advance may not be a reliable option.
How to Minimize the Cost of a Credit Card Cash Advance
Although transaction fees and high interest rates increase the costs of a credit card cash advance, you may want to consider one as a last resort option to deal with an emergency financial situation. . In this case, it is useful to understand how to limit the costs of a cash advance.
Borrow as little as possible
The ideal way to minimize cash advance fees is to borrow only the absolute minimum you need. The smaller your cash advance amount, the less fees and interest you will have to pay. Remember that a cash advance is simply a loan from a bank. The best way to speed up the process is to avoid taking a huge amount to begin with.
Repay your cash advance as soon as possible
Since your advance starts earning interest the same day you receive your money, start paying back the amount you borrow as soon as possible.
If you take out a $200 cash advance, aim to pay that amount in full – or as much as possible – in addition to your minimum payment. Set a goal to repay the amount in days rather than weeks. And don’t even consider months. At 25% APR, a cash advance of $1,000 will earn interest of approximately 70 cents per day. If you can pay it off in a few weeks, the interest won’t have time to accumulate too much. But over time, the growing interest will also increase.
Your credit card statement should show you the different interest rates for purchases, cash advances and balance transfers. Fortunately, the Credit Card Act of 2009 requires credit card companies to apply payments made above the minimum amount due to balances with the highest interest rates. Prior to the passage of this important consumer protection legislation, it was common practice to apply payments above the minimum monthly amount to the lowest interest balances first, thus extending the time needed to pay off interest rate balances. of higher interest.
How much does a cash advance cost?
You can use Bankrate’s credit card calculator to see the total cost of a cash advance as well as how different repayment strategies can change the amount you’ll have to pay.
Let’s say you take a $500 cash advance at 25% APR and pay a minimum payment of $15 each month. You would pay this amount for 58 months (almost five years!) before the balance is paid in full. You would also pay $362 in interest, plus a cash advance fee of $25 (5%) and ATM fees, probably $3 or more. So, to borrow $500, you will end up paying an additional $390.
This means that the convenience of a cash advance would cost you 78% more than the original borrowed amount of $500 if you only pay the minimum payment. Doubling your monthly payment to $30 per month would allow you to pay off your debt in 21 months with a total interest of $120 (24% more than the amount borrowed), while tripling it to $45 per month would only take 13 months and you would only pay $75 more interest (15% more).
This example highlights the importance of paying more than the minimum amount in order to minimize the cost of a cash advance. You can significantly reduce interest charges and your repayment schedule if you can make large payments above the minimum amount. If you are unable to pay more than the minimum, it may be best to save your money and avoid getting a cash advance.
When to take out a cash advance
You may find yourself in a situation where a cash advance on your credit card seems like the best option because it is, shall we say, quick. And even if that’s true, try to only consider a cash advance as a last resort. The hole you might find yourself in isn’t worth it if there are other options to consider.
If a cash advance is your only way to get some quick cash, make sure you’re aware of all the costs involved and have a plan to pay it back. Try to borrow only what you really need, because the less money you take out, the less interest you will have to pay.
Alternatives to a credit card cash advance
Before you turn to an expensive cash advance, consider these options to meet your needs and save money.
Request an extension
Instead of getting a cash advance to pay a bill, you may be able to ask your creditor to extend or change your due date. You may even be able to work out a payment plan to catch up on your account without affecting your credit. Many creditors even allow their clients to suspend their accounts for an agreed number of weeks or months due to financial hardship.
It doesn’t hurt to talk to your creditors to discuss your options. You can simply gain the flexibility you need to deal with an unexpected expense or an emergency.
Friends and family
Although borrowing money from a friend or family member can be a more flexible and less expensive option, this arrangement can also damage your relationship with the person who agrees to lend you money. If you go down this path, make sure you and the other person set clear terms before accepting any money.
Unless you have good credit, a personal loan could be an expensive option with high interest rates. Yet the interest rates and terms are generally much more favorable than a cash advance.
The bottom line
A cash advance should be a last resort due to its high interest rate, transaction fees and other factors. Consider other alternatives such as asking for an extension, getting a personal loan, or enlisting the help of a friend or family member.
If you have few options and your best bet is to get a cash advance, you can minimize the financial impact by only withdrawing a small amount and paying off the balance as quickly as possible.