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What is a cash advance?

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Having access to cash at a glance can be daunting, especially if you don’t have enough money in your checking account to cover an emergency. One way to get cash fast is to take out a cash advance on your credit card. Please note: a cash advance is not free money. Chances are your cash advance is a big expense. Fortunately, there are alternatives that could save you some money.

What is a cash advance?

A cash advance is a short-term cash loan borrowed against the limit of a credit card. Similar to how you repay purchases made with a credit card, you must also repay borrowed money with a cash advance. However, the interest rate for borrowing money from a cash advance is often much higher than the interest rate on regular credit card purchases.

How cash advances work

You can initiate a cash advance in several ways. If you have a credit card with a PIN code, you can use the PIN code to withdraw cash from an ATM (subject to ATM fees). If your credit card issuer has physical branches, you can request a cash advance from a cashier inside. Finally, if you have access to checks through your card issuer, you can write yourself a check and cash or deposit it as needed. In addition to higher interest rates on cash advances, your card issuer immediately begins charging interest on the amount of the cash advance.

Cash Advance Interest Rates

The interest rate on a cash advance will always be significantly higher than your regular purchase APR (often close to 30% variable). There’s no grace period for interest rates on cash advances, so you’ll start earning that inflated interest right away. To determine your card’s exact interest rate, check out its terms and conditions for the Schumer Box, an easy-to-digest chart that lists your card’s important information. The information you find in the Schumer Box includes your card’s regular APR, penalty fees, late fees, and your cash advance interest rate.

For example, let’s say the current variable APR for a credit card is 11.99% to 22.99%, making it a relatively low interest rate credit card. But if you check the rates and fees in the fine print, you might find that the APR for a cash advance is 24.99% to 29.99% variable, which is much higher than what you might expect from the average credit card interest rate.

Cash Advance Line of Credit

Your cash advance line of credit is the maximum amount of cash you can withdraw from your credit card and is a percentage of your card’s total line of credit, which depends on the credit card and the ‘transmitter. Remember that you are still using part of your normal credit card line of credit when you take out a cash advance, so these funds are not available for purchases.

Should I take a cash advance?

You should only consider taking out a cash advance in an emergency. Getting a cash advance is better than taking out a predatory payday loan, but it’s always better to look for potentially more cost-effective solutions. Here are some alternatives to consider before getting a cash advance:

  • Tap into an emergency fund: If you have a little extra cash, it’s best to dip into those emergency funds first rather than using a cash advance.
  • Borrow from a friend or family member: You can completely avoid inflated interest charges by borrowing from friends and family if they can afford it.
  • Find out about local organizations: Local community centers, non-profit organizations or religious organizations may have the capacity to help in times of financial crisis.

It may not be possible to completely avoid a cash advance. If you need to get a cash advance, try to withdraw as little as possible and develop a plan to start paying it back immediately to minimize long-term costs.

The bottom line

You should avoid taking a cash advance whenever possible; however, this small loan can be a viable option in times of financial emergency. Before immediately jumping into a cash advance, try tapping into an emergency fund or borrowing money from a friend or family member. Exploring other lower-cost options will save you money over time, so be aware of your choices when considering a cash advance.