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What Is A Cash Advance?

A cash advance is a short-term cash loan — an expensive one — taken against the credit line on your credit card.
Credit Card Basics, Credit Cards
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From time to time, we all find ourselves in situations where credit cards aren’t welcome as a form of payment. A broken down car, an emergency taxi ride, or a trip to the local farmer’s market are all scenarios where having cold, hard cash trumps plastic.

But what if you don’t have enough money in your checking account to cover the expense? Another option for getting some fast cash is taking a cash advance on your credit card. Cash advances are easy to get and don’t require you to have money available in your bank account – sounds convenient, right?

Convenient, yes, but is taking a cash advance a smart financial move? Take a look at the information below to see if using a cash advance is right for you.

What does it mean to take a cash advance?

Simply put, cash advances are short-term loans that you are able to take against your credit card, up to a certain amount. But unlike when you make a purchase with the card – which is also a short-term loan – you’re taking the loan in the form of cash. This can be accomplished by going to an ATM or a bank, where you’ll use your credit card (rather than your debit card) to get the cash.

Getting a cash advance is easy, but it’s one of the costliest ways to get your hands on some cash.

It’s important to keep in mind that most credit card companies won’t allow you to take the whole amount of your credit limit in the form of a cash advance. For most people, cash advances are capped at a few hundred dollars. This means that you can’t rely on your credit card to provide you with very much cash in the event of an emergency.

Why getting a cash advance is costly

Getting a cash advance is pretty easy, but it turns out that this is one of the costliest ways to get your hands on some cash. This is because cash advances come with a variety of fees and expenses that a simple ATM withdrawal doesn’t.

For one, every time you take a cash advance you’re going to get hit with a cash advance fee. This fee usually amounts to 2%-5% of the amount of the advance. This means that if you take $300 as a cash advance with a credit card that carries a 4% cash advance fee, you’ll have to pay $12 just to get the money, on top of ATM fees. There are few credit cards out there that don’t charge a cash advance fee or a nominal one. The Barclaycard Ring™ Mastercard® charges a flat $3 per cash advance, regardless of how much you advance.

Cash advances should only be used in extreme emergencies. If you’re relying on them, it’s time to take a hard look at your finances.

But the most expensive part of taking a cash advance is the interest you’ll have to pay on the money you’ve borrowed, and this can be costly in two ways. First, the interest rate on cash advances is usually much higher than the regular interest rate on your credit card. Worse, though, is that interest on cash advances starts building up on the day you take out the advance – there’s usually no grace period. This means that if you decide to take a cash advance, you’ll need to repay it as soon as possible.

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Examine your finances carefully – and look for better options

Given the costs associated with taking a cash advance, you should take it as a sign that you’re in dire financial straits if you’re considering taking one. Cash advances should only be used in extreme emergencies, so if you find yourself relying on them, it’s time to take a hard look at your finances – and make some changes.

If you do find yourself facing a cash crisis and you’re not sure where to turn, consider the options below. None of them are ideal, but they’ll probably end up costing less than a cash advance in the long run:

  • Taking a personal loan from a bank; this will be expensive if your credit isn’t great, but the interest charges and terms will still be more favorable than a cash advance
  • Borrowing money from friends or family; this might be awkward, but the savings will be worth it
  • Overdrawing your checking account; instead of taking a cash advance at an ATM, consider just overdrawing your checking account with your debit card. You’ll face a steep fee, but you won’t have to worry about paying interest.

The takeaway: taking a cash advance on your credit card means taking on a very expensive short-term loan. This is almost never a good idea, and you should consider all other options before using a cash advance. It’s also important to take the fact that you’re thinking about using a cash advance as a sign that your finances need some fine-tuning – you don’t want to end up in this situation again!

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