A credit card can be a source of cash in a pinch. If you can’t cover an unexpected expense, a cash advance from your credit card might help. But it probably won’t be cheap.
Many credit cards allow users to take a cash advance over their credit limit. An advance can be taken at an ATM, by bank withdrawal or by using convenience checks. There are different reasons to use a credit card for cash, and of course there are pros and cons to consider.
What is a credit card cash advance?
First of all, it helps to break down what constitutes a cash advance.
“A credit card cash advance is a debit from your credit card, which is a revolving, open-ended line of credit,” says Todd Christensen, education manager for the nonprofit Relief Company of Money Fit Debt.
A cash advance can earn a lump sum that you can spend as you see fit. In this regard, it is akin to a personal loan. But when it comes to how much you can borrow, how the advance is repaid, and the costs of borrowing, there are some differences.
“Loans, as most people understand, are indefinite debt with a fixed monthly payment, a fixed repayment date, and a fixed interest rate,” explains Christensen.
In contrast, a cash advance can be repaid at the borrower’s discretion. For example, you can pay off the entire advance on your statement for the next month, just make the minimum payment due, or pay something in between. This makes a cash advance more flexible than a loan, at least for repayment, but each of these options comes at a different cost.
It is not an unlimited source of money, however. Credit card companies can cap a cardholder’s cash advance limit. For example, if the card purchase limit is $ 5,000, the cash advance limit might be $ 1,500 or $ 2,000 instead.
How to take a cash advance with a credit card
Each credit card company has its own rules for accepting a cash advance. The first step to taking a cash advance is to read the fine print on your credit card agreement.
Your card contract must specify:
- Whether cash advances are permitted for the card.
- What methods are available for taking a cash advance.
- What fees, if any, apply to cash advances.
- The annual percentage that you will pay for a cash advance.
- How interest accrues on cash advance balances.
Chase, for example, lists the APR and charges for the cash advance on the first page of their cardholder agreement, along with directions on how cardholders can take a cash advance and how interest accrues on subsequent pages.
The next step is to figure out how much money you can withdraw. You can usually find it by checking your most recent statement or signing into your account online. From there, you can decide how you would like to receive a cash advance.
Most card issuers that allow you to take a cash advance offer you three ways to do this: withdrawing money from an ATM, withdrawing money from your card in person at a bank branch, or using emergency checks.
If you get money from an ATM, you will need to have a PIN set up for your credit card. You can set one up by calling your card customer service. Once you have a PIN, you can visit an ATM, insert your card the same way you would a debit card, and then find the cash advance option in your account menu. You then select the amount of money you want to withdraw, up to the cash advance limit on your card. Keep in mind that the ATM may impose a daily limit on the amount you can withdraw.
If you are making an advance on your credit card at a bank branch, you will need a photo ID as proof of identity. You will also need to have the map in hand. A cashier can help you fill out the advance and complete all the necessary paperwork.
Some credit card companies regularly send convenience checks for cash advances. You write the check according to how you use it. If you have to pay an unexpected medical bill, for example, you can write the check to the doctor’s office. Or you can write it down in cash and then cash it in your bank. It’s not that different from writing any other type of check, except that instead of withdrawing money from a current account, you remove it from your credit card account.
If you don’t have convenience checks on hand, you can request them from your credit card company. Depending on the card, you may be able to request convenience checks online or over the phone. This is for example a service that Discover offers to its members.
How much does a credit card cash advance cost?
There are two costs to consider with a credit card cash advance: the cash advance fee and the APR.
“There are different terms, depending on which card you use,” says Jun Lee, customer loyalty manager at the ScoreShuttle credit repair site. “Some come with high cash advance fees, which end up costing you more than buying or withdrawing with your debit card.”
The cash advance fee is typically 2% to 8% and may have a minimum charge of $ 5 to $ 10. If your cash advance charge is 4%, you would pay $ 40 for a $ 1,000 advance.
To add to the cost, the ATM may also charge you a transaction fee for an advance.
Even more than the fees are the interest you could pay on a cash advance. Not only is the APR for a cash advance usually much higher than the regular purchase APR, but interest charges may apply immediately.
“Most cash advances don’t have a grace period, which means your card company starts charging you interest on the same day as the cash advance,” says Christensen.
The good news is that your cash advance balance is generally considered separate from your purchase balance. This means that the higher cash advance APR and instant interest accrual only apply to the cash advance.
Another thing to keep in mind is how your payments are applied when you have a cash advance balance and a purchase balance. When you make the minimum payment, that amount may go to your purchase balance first. Anything you pay above the minimum is applied to the balance with the higher APR.
Paying off the cash advance in full as soon as possible is the best way to minimize interest charges. But if that’s not feasible, cash advances can be an expensive way to cover expenses.
Alternatives to credit card cash advances
A cash advance from a credit card can be something to keep in mind as a last resort when you need extra cash. Here are some alternative possibilities you might consider:
Just like credit card cash advances, these all have their pros and cons. With a 401 (k) loan, for example, the money you take out has no chance of growing for your retirement. And withdrawing money from an IRA could trigger a early withdrawal penalty, plus ordinary income tax.
If you are not able to pursue any of these cash advance alternatives, there are other options. For example, you could borrow from a cash advance, payday lender, or car title lender. But these can be very expensive, as Christensen points out. These types of loans “can carry annualized interest rates equivalent to 50% to 400%,” he says. A cash advance might be a better choice in this situation.
Exploring all of your borrowing options can help you decide if a cash advance makes the most sense. And if you do decide to take an advance, revise your budget and make a plan to pay it off as quickly as possible to reduce the total interest paid.