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Are Cash Advances a Good Idea?

Oct. 10, 2014
Credit Cards
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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. But it may not be the best financial decision.

What is a cash advance?

A cash advance is a short-term loan on your credit card account. You go to a bank teller or an ATM, present your card and walk away with cash. Simple enough, 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.

What are some alternatives to a cash advance?

Since a cash advance is a short-term loan, we’ll compare it to other options for quick cash:

  • An overdraft on your checking account 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) 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 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.

When does a cash advance 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 (though you might want to consider a bank account with no overdraft fees). However, it’s probably not going to be free. If you do find yourself taking out a cash advance, try to pay it off as fast as you can, since 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. And in some cases, it may provide cheaper access to cash than a debit card. Say you’re traveling internationally and have a credit card with no cash advance or foreign transaction fee, as well as a debit card with a 3% foreign transaction fee. If you pay off your cash advance ASAP, you may be better off using your credit card at the ATM.

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.

If you find yourself considering cash advances solely because you’ve forgotten to carry cash, though, you might want to check out debit cards that have no ATM fees. That way, you’ll be able to use the nearest ATM without getting slapped with an out-of-network surcharge.

Woman with card and cash image via Shutterstock