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Getting a cash advance on your credit card is a quick and easy way to solve short-term financial problems. However, cash advances are not always the best option.
A cash advance is a short-term loan against your card’s line of credit. While it might seem like an obvious choice when you need a quick cash and have no other funds, it is also an expensive type of debt that should be avoided whenever possible.
Here’s how cash advances work and what other options you can use to get cash quickly.
How does a cash advance work?
How to get a cash advance with your credit card
A cash advance allows you to withdraw money from your credit card just like you would from your debit card account:
If you have a credit card with a PIN code, you can use an ATM to get a cash advance just like you would with a debit card. Most likely, you will need to go to your bank or credit union and request a cash advance on your credit card. The representative will manage your card – and the bank or credit union and the credit card issuer may charge a fee – and then give you the requested cash amount.
Conditions and fees for cash advance
When you take a cash advance, you use your available credit card balance to take out a cash loan. This type of transaction is treated differently from your usual purchases, and your credit card issuer will charge you a different interest rate.
Here are the typical conditions and fees for a credit card cash advance:
- Cash Advance APRs are typically higher than the card’s regular APR
- There is no grace period – interest on a cash advance accrues immediately
- The cash advance fee, either a percentage of the advance or a fixed amount, is usually added and charged to your credit card account.
- Your bank or credit union may also apply fees and charges in advance of credit card funds.
The terms and fees for credit card cash advances also vary depending on the credit card issuer. Here are the terms and fees for some popular cards from major issuers:
* Whichever is greater
How much will a cash advance cost?
The main attraction of cash advances is convenience, but cash advances are expensive.
Let’s say you have a credit limit of $ 2,500, $ 1,000 is already charged to it, and you take out a cash advance of $ 700. If you use the Capital One Quicksilver Rewards card, you’ll immediately pay a variable APR of $ 21 and 24.99% on that $ 721. With the Citi Custom Cash card, you’ll immediately pay a variable APR of 25.24% on $ 735.
How a cash advance can affect your credit score
When it comes to credit reports, a cash advance is treated the same as the rest of your credit card debt. This means that it will not appear on your credit report as a separate item. However, it can still impact your credit.
“A cash advance can impact your score if you withdraw too much money,” says Howard Dvorkin, CPA and President of Debt.com. “The more money you take out, the closer you get to your credit limit. Maximizing your line of credit or using more than 30% of your credit limit can hurt your credit rating.
Since interest and fees on cash advances add up quickly, they can easily increase your credit utilization rate, especially if your card’s credit limit is low.
“To help protect your score… see if your credit card company will increase your credit limit if you absolutely have to do a cash advance transaction,” suggests Dvorkin.
Advantages and disadvantages of a cash advance
Benefits of a cash advance
- No credit check. Since you already have access to the line of credit, a credit check is not required for you to purchase a cash advance.
- Lower APR Than Payday Loans. If you’re in dire financial straits and don’t have the credit to get a personal loan, the APR on a cash advance will likely be lower than on a payday loan.
- Immediate funds. Credit card cash advances allow you to have the cash you need in one quick pass at a bank or ATM.
Disadvantages of a cash advance
- Immediate interest charges. While regular purchase APRs accumulate at the end of each billing cycle, credit card cash advances accumulate interest immediately.
- Increases the rate of use of credit. When you borrow money over your credit limit, your credit utilization rate increases, which can negatively impact your credit score.
- Higher APR than personal loans. Credit card cash advances have higher interest rates than a personal loan and earn interest immediately, so you’ll likely pay more with a cash advance than with a long-term personal loan.
It’s understandable that needing money without having it available can feel awful and put a lot of stress on you. In emergency situations, it can seem crucial to obtain funds immediately, regardless of the financial and credit consequences.
Another option to consider is the personal loan. the 24-month average personal loan rate is around 9.58%, which is much lower than the APR of a credit card cash advance. Even if your credit score isn’t at its best, there’s a good chance you’ll find a personal loan with a lower interest rate than a cash advance.
It’s also convenient that you can pay off the loan over time in fixed installments instead of worrying about accruing interest charges and hurting your credit utilization rate. Also, you may be able to get a larger sum, as cash advances are often capped at a few hundred dollars.
At the end of the line
It can be extremely stressful to have an urgent need for cash and not have any. Without emergency funds or savings, you can feel like you have virtually no options. However, a cash advance should only be considered as a last resort.
If you’ve considered the alternatives and come to the conclusion that you don’t have profitable options, be sure to calculate exactly how much a cash advance will cost you and create a plan to pay it off as quickly as possible.