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The high price of a credit card advance

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A cash advance should only be considered as a last resort.


Key points

  • A cash advance is borrowed against a credit card.
  • The interest rate and fees for a cash advance can be expensive.

If you are struggling financially and need cash fast, you may be wondering if it is possible to borrow money with one of your credit cards. The short answer is yes, and the process is called a cash advance.

As someone you meet online, however, there are some things you need to know about a cash advance. Here we spell them.

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What is a cash advance?

No matter what your reason for considering a cash advance, it helps to understand what they are and how they work.

There is a limit

The amount you are allowed to withdraw with a cash advance is usually less than your

overall credit limit. Let’s say a credit card has a credit limit of $ 5,000. The cash advance credit limit may be $ 1,500. It is important to know the credit limit of the cash advance before borrowing the funds.

READ MORE: How to increase your credit limit

There are three ways to access money

There are several ways to get a cash advance, including:

  1. From a bank by showing your card and ID to a cashier
  2. From an ATM using the PIN code associated with the account
  3. Using a convenience check provided by the credit card issuer

The APR will be higher

The APR charged to you for money withdrawn via a cash advance is higher – often much higher – than the APR charged for standard purchases.

READ MORE: APR vs. interest rate: what’s the difference?

There is no grace period

When you make a standard purchase with a credit card, you usually have until the end of the billing cycle to pay it off and avoid paying interest. The same is not true for cash advances. The day you accept the funds is the day interest starts accruing on the debt.

READ MORE: What is a credit card grace period?

How much will it cost?

The average interest rate on credit cards at the time of this writing is 16.13%. Although the APRs for cash advances vary by credit card issuer, they can easily be 5 to 10 percentage points higher than the standard purchase rate.

In addition to the interest rate, issuers normally charge a cash advance fee of 3% to 5%, or $ 5 to $ 10, whichever is greater. And if you withdraw the funds from an ATM, you can end up paying an ATM usage fee of around $ 4.50.

To put all of this in perspective, let’s take a look at how much more using a credit card for a cash advance can cost than using the same credit card for a standard purchase. In this example, we assume that it takes a year to fully pay off the card.

Transaction Type

Quantity

Interest rate

Cash advance fees

ATM usage fees

Total borrowed

Monthly payment

Total interest
Paid

Standard purchase

$ 1,000

16%

X

X

$ 1,000

$ 91

$ 89

Cash advance

$ 1,000

22%

40 $

$ 4

$ 1,044

$ 98

$ 173

Source: author’s calculations

The larger the cash advance and the longer it will take to pay it off in full, the more expensive the transaction will be. In this scenario, paying it off in one year minimized the damage caused by the higher interest rate.

Is a cash advance always a good idea?

It’s rarely a good idea to pay more interest and fees than is absolutely necessary, but there are times when a cash advance may seem like the only option available. For example:

  • You are in an emergency situation. Let’s say you’re driving through North Dakota and your transmission jumps. You have no one to turn to for help, and your credit isn’t good enough to take out a short-term loan. The only auto repair shop in town does not accept credit cards. If you know you can repay the cash advance quickly, it may make sense in the circumstances.
  • It’s midweek and your employer owes you a check by Friday. Again, knowing that you can repay the advance quickly will prevent you from paying a higher interest rate. You still won’t have to pay fees and interest for the number of days you borrow the money, but the loss won’t be catastrophic.

As a general rule, it is a good idea to avoid any loan that is going to cost you more from the time you accept the funds. To avoid having to take out a cash advance, make a point of setting up an emergency savings account. Even if you can only put a few dollars into the account at a time, you know you are headed in the right direction.

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