A credit card cash advance is an easy way for you to get cash from your credit card. If you have your PIN, you can simply walk up to an ATM to withdraw your money. Without a PIN number, you can still withdraw money by going to a bank and some stores will even let you do this.
It is so convenient…instant cash with no credit check…the logical solution seems to be to get a cash advance using your credit card. You can pay it back later, right? The truth is that cash advances are not a good idea in most instances. Yes, there are times when it seems like a cash advance is the way to go, but in most cases it’s best to avoid this particular feature on your card.
Note: This is not to be confused with payday loans or title loans, which the term cash advances, is becoming more synonymous. In any case, pretty much all cash advances are bad for you.
How Do Cash Advances Work
Cash Advance is a normal feature for most credit cards. Issuers like Chase, Citibank, Discover, Capital One, etc. offer this as a standard convenient feature for their card customers. There is a separate cash advance limit, which is normally lower than your normal credit limit.
As mentioned above, you can simply walk up to an ATM or a bank teller to get a cash advance from your credit card.
Why It is Bad…Cash Advance Disadvantages
1. Cash Advance Interest Rate is Mighty High
You may not realize this, but as a rule, the interest rate on cash advances is higher than the interest rate for purchases. You may have a fantastic rate for purchases, but use your card for a cash advance and you may wind up with an interest rate on the cash advance that is flirting with 20% interest rate or higher.
According to CreditCards.com research:
The average cash advance interest rate is 23.68 percent, nearly 8 percentage points higher than the national average rate charged on consumer credit cards.
For example, here is the extra interest according to Chase:
- Purchase Annual Percentage Rate (APR) = 13.49% to 23.49%.
- Cash Advance APR = 19.49% to 25.24%.
2. Cash Advance Fees
Higher interest rate is not the only thing you pay, there is also a Cash Advance Fee. Continuing with Chase Credit Card as an example:
- Cash Advances Transaction Fee = 3% to 5% of the amount of each transaction (minimum fee $10).
Also, the credit card company isn’t the only one tacking fees onto the transaction…
If you walk into a bank and request a cash advance off your credit card you might find yourself paying the bank for assisting you with the transaction. The same is true with an ATM withdrawal.
You don’t even have the cash in your hand yet, but you’re already handing some it over to the bank and your credit card company.
3. There is No Grace Period
When you make a purchase on your credit card there is usually a grace period that allows you to pay the balance before any interest is accrued. This isn’t usually the situation with cash advances. Interest on cash advances starts right away, so by the time your statement comes you’ve already been charged interest on the cash advance.
4. Credit Cards Maximize the Interest You Pay
When you send your payment in, the credit card company applies it to the portion of your balance with the lowest interest rate first. In other words, it’s going to take you longer to pay off your high interest cash advance than your regular purchases.
5. There Are Better Ways to Get Cash
This could be a sign of a bigger problem if you are turning to credit card cash advances out of necessity because you can’t get your hands on any money.
What is going on with your finances that you don’t have access to cash in an emergency?
You shouldn’t fall into the pattern of needing your credit card to bail you out when you need some cash because you’re setting yourself up for trouble.
Convenience Checks
Keep in mind that credit card cash advances aren’t limited to ATM withdrawals or pulling cash out at a financial institution. Convenience checks that credit card companies send you may also have all the same
trappings as cash advances unless they fall under a promotional interest rate.
Bottom Line
In any case, it’s best to avoid cash advances. If you must use them be sure you understand all the extra fees that may be involved in the transaction. Cash advances should never be an ongoing solution to financial difficulties. If you find that you’re pulling cash off your card constantly, this is a sign that something has to change.
Recommended Articles
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
What’s going on with my finances is very low income. Not much I can do about that if I can’t get a job.
Great post. So many of us forget that using a cash advance is not actually our money. It’s borrowed. And at a very high interest rate.
I could not agree more. Fortunately I am not in danger of ever using a cash advance on my credit card. I don’t know the PIN for any of my credit cards. It is hard enough for me to remember the PIN for my bank card.
Couldn’t agree with you more. If you find yourself needing to resort to a cash advance from a credit card to buy something you need, then (1) something is very, very wrong with your financial situation, and (2) it’s going to get worse as the interest charges pile up. Avoid cash advances like the plague; and if you find yourself “needing” one, take a cold, hard look at what, exactly, has put you in the financial position you’re in–and do something about it.
I think the fact that there is no grace period and that the higher interest kicks in straight away makes for a sad credit card statement at the end of the month.
interest rates on cash advances are always at least 5-10% higher than the standard APR for purchases. However this is rarely publicised in adverts and is tucked away in the small print. It also makes no sense because why should there be a difference, afterall whether you take a cash advance or pay for goods and services you are still spending money on your card. The only thing that I can think of is that the banks charge credit companies higher interest.
I think the fact that there is no grace period and that the higher interest kicks in straight away makes for a sad credit card statement at the end of the month. However this is rarely publicized in adverts and is tucked away in the small print
Such a great article totally agree. Cash advances are money chompers!!!!
Great article!! So helpful. I definitely do not like cash advances!