Your Complete Guide to Credit Card Cash Advances
Want to know the truth? I buy almost everything on a credit card. Whether we are talking about my morning coffee, my insurance premiums, or our new living room furniture, I pull out the plastic in an attempt to rack up maximum rewards. Even still, there are times when cash reigns supreme. If I’m souvenir shopping in another country or wanting to tip the bellman at the hotel, a credit card just won’t cut it.
When you think of pulling out cash from the ATM, you probably assume you’ll use your debit card to withdraw from a bank account. After all, you can’t expect to get cash on credit… or can you?
Well actually, many credit cards today offer cardholders the option of a cash advance. This feature gives them the flexibility to withdraw funds at an ATM using their credit card, instead of utilizing their bank account(s). Whether you need more cash than you have available in your checking account or have lost your debit card, there are plenty of reasons why you’d turn to a credit card cash advance option.
Let’s talk about what a cash advance is, how much it costs, and a few things to watch out for when utilizing this convenient cash option.
What is a Cash Advance?
A cash advance is a feature offered by most credit card issuers, on a variety of card products. A cash advance allows the user to establish a PIN, which they can then use at an ATM to withdraw cash… just like they would with their bank’s debit card.
The cash advance feature is unique in that it offers cardholders the ability to receive cold, hard cash from a line of credit. Instead of this withdrawal debiting their bank account, the charge will go against their credit card balance.
While most of us are accustomed to the idea of making purchases with borrowed money (ie: buying on credit), the idea of walking away from an ATM with cash from a line of credit seems very, very different. And if you’re not careful, it can also be a bit dangerous.
How Much Can You Withdraw?
As you probably expect, the amount of cash you can withdraw when utilizing a credit card advance is limited. It’s not just your card issuer who sets those limits, either.
Of course, the first and most important limit does come from your issuer. They will establish your cash advance limit at the same time that they set your line of credit limit. These numbers aren’t necessarily the same, either, so be sure to look at your account documents! While it’s not always the case, cash advance limits are often much lower than your credit card’s overall limit. For example, your card may have a $5,000 limit in total, but you can only utilize up to $1,500 of that for cash.
Another limit comes into play when you choose to withdraw from an ATM. Most ATMs have a per-transaction limit, or even a daily limit per card. At some machines, this could be as low as a few hundred dollars. So, even if you have plenty of your limit available, according to your credit card issuer, you may still be out of luck due to the ATM you choose for withdrawal.
Just like with your line of credit’s limit, your cash advance limit is likely to change over time. As your overall credit limit goes up, your cash advance limit probably will, too. And if you want or need either limit to go up for a specific reason, you can always call and request an increase with your issuer directly.
Why Would You Choose an Advance?
There are a number of reasons that you might choose to utilize a cash advance. One of them, of course, is convenience.
If you are traveling, especially in a foreign country, you may choose to leave your debit card at home. After all, your purchases aren’t protected there and you’re subject to foreign transaction fees – something you can avoid with the right travel credit card. But if you wind up needing more cash than you have on-hand, a credit card cash advance can meet your needs. This essentially allows you to take out a short-term loan against your line of credit, which you can repay when you get home.
Your credit card’s cash advance feature can also be a helpful last resort, if you were to ever lose your debit card or have it stolen. Without a debit card, you may have trouble withdrawing cash… especially if you bank with an online-only institution and can’t walk into a bank branch! In this case, a credit card cash advance might be your only choice for quick access to good ol’ greenbacks.
Lastly, you might utilize a cash advance feature simply because you’re low on cash. If you wind up in a bind or need more cash than you have before your paycheck hits, a cash advance can step in as your pinch hitter. It’s usually cheaper and more convenient than a payday loan, and you already have everything you need in your wallet. All you have to do is stop by the ATM
How Much Does a Cash Advance Cost?
As great as cash advances sound, though, it’s important to remember that they aren’t free. In fact, they can wind up being pretty pricey if you’re not careful.
First and foremost, many credit cards will charge a cash advance fee for the simple act of utilizing this sub-line of credit. The fee amount varies between issuers and credit products, so be sure to read the fine print; the average, though, is $10 or 5% (whichever is greater). This means that if you were to take out a $500 cash advance, it would cost you $25 in fees. A $1,000 advance? That will be $50 in fees.
How much is your convenience worth?
If you fail to pay off that balance right away, you are also subject to interest fees, just as you are with your typical credit card account balance. However, it’s important to note that cash advance fees often carry separate interest rates all their own, and it’s not uncommon for them to be higher than your purchase APR. So, even if you’re paying 14.49% on all of your purchases, you may very well be paying 19.49% on your cash advances... even though both balances are carried on the same card.
Lastly, you’ll incur fees when you withdraw cash from an ATM. These are usually pretty minor, in the $2-5 per-transaction range, but this is still extra cash out of your pocket. When you’re adding those dollars onto the fee charged for the actual advance service (from your issuer) and the interest fees, you are talking about quite a bit of extra money out of your pocket.
What to Watch Out For
While cash advances are good safety nets in certain situations, they should absolutely not be your default plan. There are many ways that this feature can wind up costing you a lot of money in the end and even getting you into debt, which is why many people avoid using it altogether.
Use It As a Last Resort
The first thing to remember is that a cash advance should only be used in an emergency situation. If you are stranded without cash and no way to access your bank account, a credit card advance can be a great way to access short-term funds. It shouldn’t, however, be used to get your hands on cash that you don’t technically have (or can’t afford).
If your bank account is empty, it can be tempting to pull from your cash advance line of credit. But doing so is no better than making purchases on a credit card that you can’t afford to pay back right away. These habits can quickly get you into serious debt.
You Won’t Earn Rewards
Utilizing a cash advance on a credit card will result in interest charges, just like your purchases. It will impact your overall line of credit, just like your purchases. And the amount will show up on your statement/credit report at the end of the month, just like your purchases. Unfortunately, though, your cash advance won’t earn you cash back rewards, like your purchases do.
Cash advances may cost you significantly more money, in the form of fees and higher interest rates. Add that to the fact that you won’t even earn rewards on that spending, even if it’s coming from a rewards-based card, and you have another tally in the negative column.
I’ve said it already but it bears repeating: cash advances are expensive. You’ll pay added fees around every turn, and they make it very easy to dig a hole into debt that you can’t climb out of. Avoid them if you can.
You’ll pay fees for the actual cash advance itself, which can easily run you tens of dollars with each transaction. Then, you’ll pay fees to the ATM from which you withdrew your cash in the first place. Lastly, you’ll pay (an often higher rate of) interest on the advance, adding to the expense of this “convenience.”
For most situations, it just isn’t worth it. You’re much better off keeping an emergency fund handy for sticky situations, or even borrowing from your parents if necessary.
There’s No Grace Period
One little-known fact about cash advances is that they rarely include a grace period with interest charges. What do I mean by that?
When you buy a pair of shoes, or a couch, or even your groceries on your credit card, the transaction is added to your balance. At the end of the billing cycle, you’ll get a statement of the past month’s purchases, along with a due date that’s at least 21 days later. If you pay the statement balance in full by the due date, you won’t owe anything in interest; essentially, you will have gotten a short-term loan without any finance fees. (Of course, if you don’t pay the balance in full, you’ll then owe interest on the amount that carries over.)
Cash advances almost never work that way, though.
With credit card cash advances, your transaction will begin accumulating interest from day one. By the time you receive your statement at the end of the billing cycle, the amount withdrawn will have already accrued interest fees, which will be added to the balance. Even if you were to make a payment on your credit card account the very next day after taking out a cash advance, you will still owe something in interest.
This makes it even easier for interest charges to rack up. If you then carry your balance from month-to-month without paying it in full right away, compounding will dig your hold even deeper.
You’ll Need to Set Up a PIN
The best argument for a cash advance is convenience, if you’re in a sticky situation. However, if you don’t plan ahead for this situation, you won’t even be able to enjoy the convenience it provides… mainly because you don’t have a PIN established.
Some credit cards will be delivered to you with a PIN when you first open the account. Most, though, will require you to log in online or call the issuer to establish/request a PIN, prior to even using the cash advance feature. This process can sometimes take as many as 7-10 business days to complete, during which you won’t even be able to use your card at an ATM to pull out cash.
If you think that there’s ever a chance you’ll need to use the cash advance feature of your credit card, you should plan for it now but setting up your PIN. Otherwise, it won’t do you much good in an emergency situation.
Should I Ever Get a Cash Advance?
Credit cards can come with a number of excellent, and convenient, features. For many of us, though, the cash advance doesn’t fall into this category. Instead, most people avoid it altogether due to the expense it incurs.
If you’re between a rock and a hard place, and you need cash without any other option, a cash advance might be your best bet. It’s usually better than a payday loan and faster than, say, a personal loan. But it should truly be regarded as a last resort, especially if you have time and are looking to finance a purchases in which case it makes more sense to search out the best 0% APR credit cards and utilize their financing benefit.
Thanks to fees on top of fees – from the ATM to the charge itself to the interest that starts ticking the moment the charge posts – cash advances from a credit card can eat your finances alive. If you use them wisely, they might be well worth the cost of convenience. If you’re not careful, though, they can easily get you into serious financial trouble.
Like a fire extinguisher, a credit card cash advance is a great tool to have under the sink… I just hope you never actually need to use it.