Are Cash Advances a Good Idea?

Every once in a while, you may find yourself needing cash but holding nothing but credit cards. Maybe you’re at a cash-only café, or your taxi driver won't take plastic. Whatever the reason, a credit card cash advance can seem like a tempting option. A cash advance is a short-term loan on your credit card account. It’s a simple transaction that can have very expensive consequences. More often than not, it’s a terrible idea.

» MORE: Can I disable cash advances on a credit card?

» MORE: What is a credit card cash advance and how can you change it?

The problem with cash advances

Getting a cash advance is as easy as going to a bank teller or an ATM, presenting your card and walking away with cash. It sounds ideal, but cash advances tend to come with fees and/or higher interest charges. Here’s a breakdown of the differences between a cash advance and a regular purchase:

• Cash advance fee: As the name implies, this is a one-time fee charged when you take your advance, usually ranging from 3% to 5% of the amount. For example, if you take out a $200 cash advance, the fee of $6 to $10 will be tacked on to your account balance.

• Higher interest rate: Many cards charge a higher APR for cash advances than for regular purchases.

• No grace period: Your credit card usually gives you a grace period of at least 20 days to pay off your purchase before you’re charged interest. Cash advances, though, start to accrue interest from day one.

• Lower credit limit: Some credit cards have a separate cash advance credit limit, which is lower than the overall credit limit.

» MORE: Credit cards with no cash advance fee

What are some alternatives to a cash advance?

There are plenty of other ways to get fast cash. Here are some examples that may be more relevant to you:

• Promotional offers from your card's issuer: In recent years, some credit card issuers have unveiled cheaper ways to tap into your credit line, including the option to turn your available credit into an installment loan without requiring a new loan application. You're still charged interest when you use this option, but you'll possibly get a more reasonable rate.

• An overdraft on your checking account: It may cost $25 to $35 if your account balance goes negative but you’ve authorized the bank to allow the withdrawal anyway. You can opt out of this, of course, but it is an option for short-term funds. Be careful, though — some banks also charge extended overdraft fees.

• An early withdrawal from a certificate of deposit (CD): This is another option if you need money right away. However, CDs are meant for long-term deposits, so you might face early withdrawal penalties or have your CD canceled.

• A personal loan: This alternative is typically more involved than the other options, as it involves you going to a bank and applying for the loan. Interest rates on 24-month personal loans are lower than that on most credit cards, but the rates on short-term loans from payday lenders are often much higher.

» MORE: 7 alternatives to credit card cash advances

When does a cash advance make sense?

Cash advances almost never make sense.

Compared with the alternatives above, you might very well find that a cash advance on your credit card is the least expensive option once your crunch the numbers (though you might want to consider a bank account with no overdraft fees). However, it’s probably not going to be free. If you must take out a cash advance, it only makes sense to do so when you know you’ll have the money to pay it off as fast as you can. Otherwise, the interest piles up with every passing day.

The balance might tip in favor of a cash advance if you’re using a card with no cash advance fee. In that case, you need only worry about the interest payments.

» MORE: Ways to get fast cash

Even better: Avoid needing an advance

Build up an emergency fund to cover unexpected expenses. Consider setting up automatic deductions to transfer money from your primary checking account to a “rainy day” account, or look at a few ways to earn extra money on the side.