What Is a Cash Advance & How Do They Work?

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There comes a time in most people’s life when they say to themselves, “I could really use a bit more cash.” Life can be expensive. In the event of an unexpected cost, such as a medical bill, a legal expense, or an auto repair, sometimes you simply don’t have enough. 

If you’re looking to secure more money in a short amount of time, a cash advance can be the right solution for you. A cash advance is a short-term loan taken out against your credit line, with a limit offered by your credit card issuer. A cash advance can be instant, or it may take a few days. Read on to learn all about cash advances, or use the links below to jump to a section of your choosing.

Cash Advance Overview
With a cash advance, you’re able to borrow money short term against your line of credit. Generally, your cash advance allotment is less than your credit limit. Cash advances typically have high interest rates, meaning you’ll likely have to pay back a lot more than you borrowed.

What is a cash advance? 

A credit card cash advance is a short-term loan that gives you cash by borrowing from your credit card’s available line of credit. Imagine if you could use your credit card to purchase cash, and then pay off the balance of that cash at a later date. That is, in essence, a cash advance.

Here’s how a cash advance works: you can insert your credit card into an ATM, enter a PIN, and withdraw cash. While a debit card pulls from existing money in your bank account, a cash advance pulls from the available balance on your credit card. 

Much like anything else purchased with your credit card, a cash advance must be paid back at the end of each month, or else it is subject to an interest rate. However, the cash advance interest rate is not the same as your standard credit interest rate. In most cases, the cash advance is many times higher, averaging over 21% for most credit issuers. 

How much cash can you withdraw using a cash advance? 

Because a cash advance pulls directly from your credit balance, you can’t pull any more than your monthly credit limit for a cash advance. So, if you have a monthly credit limit of $3,000, it’s guaranteed that $3,000 is the maximum cash advance you could withdraw. It’s also based on your available remaining credit balance for that month. If you’ve already put $300 on your credit card that month, it’s guaranteed that $2,700 is the maximum cash advance you could withdraw that month. That said, most credit issuers set their cash advance limit much lower than your monthly credit limit. 

To determine the maximum cash advance available to your credit card, all you need to do is call your credit card issuer. Oftentimes, it’s also posted on your credit card statement or online credit card portal. 

Cash advance terms 

A cash advance certainly puts an oftentimes significant amount of cash into your hands quickly, but it does so at a handsome cost. Cash advances have many terms, and with many terms come many fees. Let’s review the terms of a cash advance. 

Credit card cash advance limit 

As mentioned earlier, a cash advance limit will never be larger than the available balance on your credit. However, in most cases, it will be significantly less—sometimes only 20%. 

Credit card cash advance APR 

According to usa.gov, an APR is an annual percentage rate. Every type of loan has an APR, from home mortgages to credit cards. An APR is an interest rate from a yearly perspective. It’s the percentage of your total loan amount that you’ll end up paying in interest, charges, and fees over the course of a year. Your cash advance APR is not the same rate as your credit card APR, but many times higher. For instance, if you have a cash advance loan of $1,000, for which you’ll end up paying $100 in fees throughout the course of a year, your loan has a 10% APR. A higher interest rate means you’ll end up paying a lot more than what you borrowed.

Credit card cash advance fee 

At the time of issuing your cash advance, most credit issuers will tack on a fee of 3%-5% for the withdrawal. For your $1,000 cash advance, you may end up paying $50. 

Credit issuer service fee

As with many bank or financial transactions, there may be a service fee associated with your cash advance. 

Minimum monthly credit payment 

While there are no requirements in terms of how long it takes you to pay back your cash advance, you will still need to make your minimum monthly credit payment each month. 

Pros and cons to cash advances 

As with any type of money lending, there are always advantages and disadvantages to consider. Here are the main pros and cons you should be aware of when considering taking out a cash advance:

Pros of taking out a cash advance

The most significant selling point to a credit card cash advance is its speed. A cash advance can get you a lump sum of cash in a few days max. And many times, you can get that chunk of change on the spot. It’s also simple. There’s no need to go through third-party lenders or meet with a loan representative. You simply need to see a teller. And if your credit card has an associated PIN, you may be able to do the whole thing through an ATM. 

Cons of taking out a cash advance

The cons of a cash advance are, of course, the fees. As we’ve mentioned, cash advances are very, very expensive. The average APR for cash advances is just above 21%, while the average credit purchase APR is only 15.7%. And unlike a credit card APR, a cash advance APR is unavoidable. Standard credit card purchases have a grace period for interest accrual; you won’t be charged interest unless you fail to pay off your balance at the end of each month. If you’re the type of person who pays off your total credit balance at the end of each month, you’ve probably never paid a single percent in your credit card APR. With cash advances, on the other hand, you start accruing interest the minute the cash advance is received. Even if you pay the entire cash advance back at the end of the month, you’ll still be liable for interest on the time between the day the cash advance was received and the end of the month. 

Does a credit card cash advance impact my credit score? 

The act of taking a cash advance has no impact on your credit score. It does not drop because you need a cash advance. Of course, paying your credit balance in a timely manner will result in stronger credit, and late payments will lower your credit score, and your credit card cash advance is included in this balance. However, where a cash advance can have a significant effect is with your credit utilization ratio. 

Your credit utilization ratio is a measure of how much of your total available credit you utilize each month. For instance, if your credit limit is $1,000, and you have a $300 balance, your credit utilization ratio is 30%. If you have a $1,000 balance, your utilization ratio is 100%. A high utilization ratio can negatively affect your credit score. That’s because credit card issuers see high utilization as an indication of credit risk; it’s possible you’ll owe more than you can pay. 

Alternatives to a credit card cash advance 

According to consumer.gov, a credit card cash advance is better than a payday loan, but not significantly. The moral of the credit card cash advance story is that it can be used as a last resort, but you should try to exhaust all other options first. Before choosing a credit card cash advance, consider the following alternatives: 

  • Is there a family member or friend you are comfortable asking for a loan from? 
  • Have you checked with your local charities or non-profit organizations to see if there are funds or grants that you are eligible for? 
  • Can you take out a personal loan from your bank? These often have much lower interest rates. 
  • What are the fees associated with overdrawing your checking account? This isn’t a great practice but could be used in an emergency situation. 

Of course, sometimes there simply aren’t any other options. In that case, makes sure you’re as informed as possible about taking out a cash advance.

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