A credit card cash advance seems like a good way to get some when you’re low on funds. Sure credit card cash advances are fairly easy to get – you can get one at nearly any ATM if you have a PIN or you can use one of the convenience checks your card issuer included with your billing statement. Unfortunately, many credit card users who take out a cash advance fail to realize just how expensive they really are or why they are such a bad idea.
You’ll pay a cash advance fee.
Cash advances aren’t free. A cash advance fee will be added to the balance of your cash advance. Credit card cash advance fees are calculated in one of two ways (or a combination of the two ways). You might be charge a cash advance fee that’s a percentage of the cash advance. The percentage is typically between 2% and 4%. That’s $2 to $4 for every $100 in cash you take out.
Some credit card issuers charge a flat fee regardless of the amount of the cash advance. For example, you might be charged a $10 cash advance fee regardless of whether you withdraw $100 or $1,000.
Finally, some credit card issuers use a combination of both these methods. For example, the card issuer might charge a fee that’s 3% of the cash advance or $5, whichever is greater. The minimum cash advance fee guarantees the card issuer receives a certain amount of money for your cash advance just in case, the percentage method is low.
You’ll pay an ATM fee.
If you use another bank’s ATM, you will probably be charged an ATM fee between $2 and $5. This is the same fee you’d pay if you used your check card with withdraw cash from another bank’s ATM. If your credit card issuer is a bank with ATM’s you may avoid the ATM fee by using your bank’s ATM. Otherwise, the fee will be added to your cash advance balance.
You’ll pay a higher interest rate.
One of the things that makes cash advances a bad idea is the higher interest rate. Cash advances nearly always have a higher interest rate than the interest rate that’s applied to your purchases. This means you pay more money for taking out a cash advance than you would making a purchase.
The cash advance interest rate is usually a few points higher than your purchase interest rate. Look at your credit card billing statement to learn your cash advance interest rate.
Interest starts accruing immediately.
Unlike purchases, cash advances don’t have a grace period, so interest starts being added to your balance starting on the day you take out the cash advance. By the time your billing statement comes in the mail, you’ll already have a finance charge on your cash advance, even if you started the billing cycle with a $0 balance.
Credit card cash advances are paid last.
If your credit card has multiple balances with different interest rates and a cash advance is one of them, your cash advance will probably be paid last.
Anytime you make a payment above the minimum, your credit card issuers can apply the payment to whichever balance it chooses. Card issuers usually apply any payment above the minimum to balances with the lowest interest rate, which is usually your purchase balance. Your cash advance balance, which will have a higher interest rate, may not have a payment applied to it. As a result, your cash advance balance may increase after finance charges are added. The longer it takes to pay off your lower interest rate balance, the higher your cash advance balance will become.
This method of applying payments to the balance with the lowest interest rate can only be used for a short period of time. After February 22, 2010, a new credit card law will require credit card issuers to apply any above-minimum payment to balances with higher interest rates.
How to Avoid a Cash Advance
These are some ways to avoid a credit card cash advance:
- Ask your employer for an advance on your paycheck. If there is a fee for an advance on your paycheck, it will pale in comparison to cash advance fees.
- If you can’t get an advance on your paycheck, consider working overtime to increase the amount of your next paycheck. Make sure you get approval ahead of time.
- Sign up for your bank’s overdraft protection. With overdraft protection, your bank uses a line of credit to cover transactions for which you don’t have enough money in your checking account.
- Borrow money from a family member or friend. They may not charge a fee at all for loaning money to you.
- Get a small loan from your bank. A loan will have a lower interest rate than a cash advance and will cost less if you pay it off quickly.
- Build an emergency fund and use it instead of borrowing money when you run into a financial emergency. An emergency fund must be planned and built well ahead of time.
- If you need money immediately, sell some items on eBay or Craigslist to earn cash.
If You Must Use a Cash Advance…
Realize that cash advances are expensive. Use a credit card that doesn’t have a balance so you can pay your cash advance back quicker. You can reduce the cost of a cash advance by paying it back by the time the billing statement comes rather than over a period of time.
Don't forget to let me send you future guides and tutorials. Just subscribe to the RSS feed, or just enter your email below; I'll make sure the updates are emailed to you.
