What is a cash advance and how does it work?

Woman withdrawing money from ATMImage: Woman withdrawing money from ATM

In a Nutshell

A cash advance is a short-term loan you can take against the available balance on your credit card. It’s a quick way to get cash, but it can also be expensive. So you might want to look for other ways to borrow money before taking this route.
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A cash advance is a short-term loan you borrow against the available balance on your credit card.

While a cash advance seems both quick and easy, it can also be expensive — so you should think carefully about whether you really need to spend the money and if a cash advance is the best option for you.

How does a cash advance work?

With a cash advance, you’re essentially using the available balance on your credit card to take out a short-term loan. Instead of borrowing money to buy a good or service with your credit card, you’re borrowing cash against your credit limit. Unfortunately, credit card companies don’t treat these two types of transactions the same.

If you buy a good or service with your credit card, the company will charge you the purchase interest rate stated in your contract, usually listed as the purchase APR, or annual percentage rate. And if your card offers a grace period, you won’t start accruing interest on that purchase until your payment is due. That means that as long as your card has a grace period and you pay your balance in full and on time each month, you might never have to pay interest on your purchases.

Cash advances work a little differently though — grace periods typically don’t apply. You’ll start accruing interest on the advanced amount as soon as you take the money out, and your credit card company will likely charge you a higher interest rate for cash advances than it does for normal purchases, plus a processing fee.

How much will a cash advance cost you?

If there’s one main takeaway from this article, it’s that a cash advance could end up really costing you if you’re not careful. To make an informed decision on whether to take out a cash advance, start by calculating the total potential cost.

Start by finding your credit card contract and locating the following information:

  • The cash advance fee (often between 3% and 5%, or $5 to $10, whichever is greater)
  • The APR your card charges for cash advances (often higher than the APR for regular purchases)
  • When you start accruing interest on the cash advance and how often the interest compounds (for many credit cards, it accrues immediately and compounds daily)

If you are carrying a prior balance, then taking out a cash advance can add further complications. The good news is that your credit card issuer is generally required to apply your payment (above the minimum) to the card balance with the highest interest, which may be a cash advance. The bad news is that you’ll continue accruing interest on any remaining balance that you haven’t paid off. This could make it more difficult to pay off any debt already on your card when you took out the cash advance.

In addition to potentially spending more time in debt, taking out a cash advance can also increase your credit card utilization ratio (how much of your available credit you’re using) — which can hurt your credit.

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Why use a cash advance?

Even though there are a lot of costs and high interest rates associated with a credit card cash advance, you may still want to consider one in certain situations.

If you’re traveling in a foreign country and you haven’t notified your bank of your travels, you could end up stranded without access to local currency. If it suspects fraudulent activity, your bank may put a hold on your checking or savings account, leaving you disconnected from your cash. Usually, you can clear this up with a simple phone call, but you might not have access to cell service or international calling, or you may have trouble connecting with a bank representative because of a time difference. As long as your credit card hasn’t also been blocked, you could use it to take out a cash advance in a pinch.

You may also decide on a cash advance in other cash-only situations, say, if you’re short on rent and your landlord doesn’t accept credit cards, or if you find yourself in an emergency situation that requires cash immediately.

But in all of these scenarios, if you have the option to use a debit card to pull out cash directly from your bank account, we recommend doing that over a cash advance.

Alternatives to a cash advance

There are lots of reasons you might need quick-and-easy access to cash, and luckily there are some alternatives to paying the high fees and interest associated with cash advances. If you don’t need the money immediately, you could try taking out a personal loan.

You could also borrow the money from friends or family, take on odd jobs to earn extra cash or even ask your creditor if it will give you some extra time to pay (working with a credit counselor may help). If the purchase you want to make isn’t essential, you could also wait to spend the money until you have it.

Bottom line

There might be times when you feel that taking out a cash advance from your credit card is the only option, but there are likely other ways to access the money you need. Before you take your credit card to the ATM, make sure you know exactly how much the cash advance will cost you, whether you have another option and whether this purchase or payment can wait. Then you can make an informed decision on whether a cash advance is the right option for you.

About the author: Lauren Hargrave is a writer from San Francisco who focuses on technology, finance and wellness. Her work has appeared on Forbes.com and in The Atlantic. Lauren holds a bachelor’s degree … Read more.