Credit Cards

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’re ever in financial trouble and need cash fast, you may be wondering if it’s possible to borrow money from one of your credit cards. The short answer is yes, and the process is called a cash advance.

However, just like someone you meet online, there are a few things you need to know about a cash advance. Here we detail them.

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What is a cash advance?

No matter why you’re considering a cash advance, it pays to understand what they are and how they work.

there is a limit

The amount you are allowed to take out through a cash advance is usually less than your

full 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 you borrow the funds.

READ MORE: How to increase your credit limit

There are three ways to access the money.

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

  1. From a bank showing your card and ID at an ATM
  2. From an ATM using the PIN number associated with the account
  3. By using a convenience check provided by the credit card issuer

The APR will be higher

The APR you’re charged for money taken through a cash advance is higher, often much higher, than the APR you’re 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 generally 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 on the debt begins to accrue.

READ MORE: What is a credit card grace period?

How much will it cost?

The average interest rate on credit cards as of this writing is 16.13%. While cash advance APRs vary by credit card issuer, they can easily be 5-10 percentage points higher than the standard purchase rate.

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

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

Transaction Type

Amount

Interest rate

Cash advance fee

ATM Fee

borrowed total

Monthly payment

total interest
Paid out

standard purchase

$1,000

sixteen%

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 takes to pay it off in full, the more expensive the transaction will be. In this scenario, paying it off in a year minimized the damage caused by the higher interest rate.

Is a cash advance ever a good idea?

It’s rarely a good idea to pay more in interest and fees than you absolutely have to, but sometimes a cash advance can 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 burns out. You have no one to call for help, and your credit isn’t high enough to get a short-term loan. The only auto repair shop in town does not accept credit cards. If you know you can pay off the cash advance quickly, it may make sense under the circumstances.
  • It’s midweek and your employer owes you a check by Friday. Again, knowing that you can pay off the advance quickly will protect you from the full burden of paying a higher interest rate. You still won’t have to pay fees or interest for the number of days you borrowed the money, but the loss won’t be catastrophic.

As a general rule, it’s a good idea to avoid any loan that costs you more from the moment you accept the funds. To avoid the need for a cash advance, be sure to create an emergency savings account. Even if you can only put a few dollars into the account at a time, you know you’re moving in the right direction.

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