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Credit Card Cash Advance – How It Works

A credit card cash advance means borrowing cash from your credit card account instead of withdrawing from your debit account.  Most credit card companies have a cash advance feature on their cards. But is it the right thing to do? What is a credit card cash advance, how it works and what its pros and cons? Start here:

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Using your credit card to make purchases has become a normal and even natural practice for many of us.  It has become almost automatic to use our credit card in everything such that we don’t even think about it anymore.

We use our credit cards to pay for practically anything: for groceries, gas, food, utilities, college tuition, online shopping, etc.  I bet you can’t even remember the last time you made a substantial cash purchase, let alone carry a load of cash in your wallet or purse.

Many of us have grown accustomed to paying purchases with a credit card that using cash has become a strange feeling.  But what if you need cash in a hurry and you need more than what you currently have in your bank account?  This is the time when a cash advance may prove useful.  However, before you go to this option, learn all the pros and cons of using a credit card cash advance.  Then, you can decide if it is the correct financial solution for you.

What Is A Credit Card Cash Advance?

A credit card cash advance means borrowing cash from your credit card account instead of withdrawing from your debit account.

  Most credit card companies have a cash advance feature on their cards as a form of convenience to cardholders aside from being able to use for daily purchases.  Getting an advance is as easy as withdrawing from an ATM or writing a check at your bank.  But take note, that this convenience carries quite a high cost for you.

While financially, getting a cash advance is not very ideal or wise, it makes sense when your money problem is unpredictable or if you find yourself in an emergency.

How and Why Do You Get a Cash Advance?

If you’re the type of person who only brings credit cards for your day-to-day spending, there might find yourself in a situation where the seller does not accept credit cards.  Some examples of ‘cash-only’ vendors are street-food sellers, farmers market vendors, small mom-and-pop operations, etc.   In such case, it might be tempting to just get a credit card cash advance.  Some people might also resort to cash advances when they need paper money but don’t have enough in their bank account.

If your credit card came with a PIN, you can get a cash advance straight out of an ATM.  Otherwise, you’ll have to go to a bank that offers advances through your card’s network such as Mastercard or Visa.  They will probably ask for an ID card.

Keep in mind that most credit card companies won’t allow you to take your entire credit limit in the form of a cash advance.  For many cardholders, the card companies restrict the cash advance to a maximum of a few hundred dollars.  This would mean that in an emergency, you can’t count on a credit card advance to provide you with too much cash.

How Much Cash Can You Get?

You can withdraw only up to your cash advance limit, which is usually lower than your total credit limit.

You can review your recent credit card statement or log in to your online account to check your cash advance limit and how much of it is still available.  Your available cash advance limit may be lower than your actual limit if you already have an existing balance on the card.

How Much is a Credit Card Cash Advance Fee?

You may have to pay a fee for a cash advance transaction and a higher interest for the amount you have withdrawn.

The cash advance fee could be a percentage of the cash advance amount or a flat rate, depending on your credit card issuer.  For example, your credit card company may charge a fee of 5% of the advance or straight up $10, whichever is higher.  Check your credit card terms to know the exact fee you need to pay for a cash advance transaction.

The exact amount of your cash advance fee will depend on the amount you’ve withdrawn and the way your credit card issuer calculates the fee.

The common practice is to charge whatever is higher between a flat fee and a percentage of the cash advance.  For example, the usual cash advance fee is the greater between $10 or 5% of the withdrawn amount. So, using these parameters, if you take out a cash advance of $100, the issuer will choose between the flat rate of $10 or $5 (5% of $100).  In this case, you will have to pay $10 which is the higher amount.  But supposing you take a cash advance of $500, you will have to pay $25 (5% of $500) which is higher than the $10 flat rate.

You’ll also have to pay a cash advance fee when you use a cash advance convenience check or use your credit card as overdraft protection or other cash equivalent transaction.  The fee for using your credit card for overdraft protection will usually be different from the regular cash advance fee.

Current regulations require your credit card issuer to disclose the method it uses to calculate your cash advance fee.

Check your credit card agreement or the fine print of your billing statement for more information.  If you have questions about your cash advance fee, get in touch with your credit card’s customer service department.  The number is usually printed on the back of your credit card.  Know how they will compute the cash advance fee so it won’t come as a surprise.

The Pros and Cons of Using a Credit Card Cash Advance

Its main advantage is convenience – it’s relatively easy to get and does not require you to store any money upfront in any account.

However, you have to pay a hefty price for this convenience.  Consider the following:

  • Cash advance fees. Your card issuer will collect this from you.  As discussed above, some charge a flat fee per cash advance ($5 or $10).  Others charge a percentage of the amount you withdraw, sometimes as high as 5%.  Most of the time, it’s a percentage with a minimum dollar amount – such as 3% or $10, whichever is higher.
  • ATM or Bank fees. The institution that will handle the transaction will collect this from you.  It could be the owner of the ATM or the branch where you will claim your advance.
  • Interest.  This is a financial double-edged sword that cuts you two ways.  First, you have to pay a higher interest rate for cash advances compared to interest on purchases.  Next, the interest will accrue almost immediately.  You will not enjoy any grace period such as what you will have with purchases.
  • Payment allocation rules. Under the Federal Law, credit card issuers will apply the minimum payment to balances with the highest interest rate.  However, anything beyond the minimum, credit card companies get a free hand.  Often, it will take longer to pay off a cash advance balance – and obviously, by paying longer means you’ll pay more interest in the long run.

Consider Other Ways Before

Although getting a cash advance from your credit card may be quick and easy, it is a very expensive way to get money fast. Before you opt for this type of loan, you might want to consider some other ways to get the money  you need. Maybe try a credit union, borrowing money from friends or family, or try selling some of your personal property on eBay or CraigsList. While a cash advance can help you fund an unexpected expense, it can be a very expensive short-term loan.

It is important to examine your finances carefully and do what is right for you. If you do decide to use a credit card cash advance, make sure you pay it off quickly and get your finances back on track as soon as you can. The quicker you pay this loan off, the better your finances and credit score will be. Using this type of loan once in a while has its purpose – just don't get in the habit of using this type of high-interest loan very often.

Try to Avoid Getting a Credit Card Cash Advance

If you step back and look at the entire picture, you will see that the cons really outweigh the pros.  It might be too easy to take out a cash advance within your credit limit but unless it is an extreme emergency, it should be your last option.

You may be tempted to get a cash advance given its convenience but remember that it is a very costly way to get money fast.  So before considering this option, you might want to explore other ways to get the cash that you need.  Yes, a cash advance can help you remedy an unexpected expense but it can be a very expensive short-term borrowing.

It is crucial that you take stock of your finances carefully and decide logically.  If you do decide to get a cash advance, make sure that you have a plan how to pay it off quickly so you can get your finances back on the level.  Paying your cash advance fast will have a more positive impact on your finances and credit score.  Using this type of facility once in a while has its purpose.  However, avoid making it a habit to use this high-interest loan very often.