Credit cards are a fundamental financial tool in the modern economy, which helps explain why around 169 million Americans have at least one card. Different cards also offer different benefits and features, such as cash back on certain categories of purchases or discounts from specific stores.
One feature that almost every card offers is a credit card cash advance. While it’s an option you might think about using, there are things you should know about these cash advances.
Keep reading and we’ll cover the most important things you should consider before you take that first cash advance.
1. Cash Advance Fees
When you take out a cash advance, it’s not like using your debit card at the ATM. You typically pay a fee when you use ATMs outside your bank’s network, but it’s typically a flat fee that goes to whatever bank controls the ATM.
When you take a cash advance, you still pay that ATM fee. There’s a good chance your credit card will also charge a similar fee for using the ATM.
On top of those fees, your credit card company also includes a cash advance fee. The exact fee will appear in the disclosure for your credit card, but 5 percent is a fairly typical fee.
Let’s say you take a cash advance for $300. You pay $15 for the actual cash advance fee. Assuming the bank that owns the ATM and your credit card company both charge something near the average ATM fee of $4.68, you’ll pay a little over $24 just in fees.
2. Higher Interest Rate
If you don’t read the interest rate and fees disclosure of your credit card carefully, you might assume that your cash advance has the same interest rate as your regular purchases. It doesn’t.
While the average APR for credit card purchases hovers around 16 percent, the average interest rate for cash advances hovers around 24 percent.
That means you’ll end up paying a lot more in interest charges, especially if you don’t pay off that cash advance fast.
3. No Grace Period
A cash advance differs from a regular credit card charge in another fundamental way. You don’t get any grace period.
With normal credit card charges, you pay no interest at all if you pay them off within a certain time period. The interest starts on a cash advance as soon as you withdraw the money.
So, not only will you pay a higher interest rate, you accrue that interest from day one.
4. Cash Advance Limits
Credit card companies generally set a hard limit on how much of a cash advance you can take. It’s almost always lower than your actual credit limit.
The card issuer might set the cash advance limit at a fixed number, such as $400 for all cards. They might also set the limit based on a percentage of your credit line.
As a general rule, though, the cash advance can’t exceed your actual available credit. If your credit limit is $2,000 and you carry a balance of $1,850, you can’t get a cash advance for more than $150.
5. Adjust Your Spending
Taking cash advances from a credit card often indicates that someone is living beyond their means on some level. That also means you can make a number of adjustments that will free up cash from month to month.
Go through your bills and look for subscriptions or services you rarely use. For example, many people maintain subscriptions with multiple streaming video services. Keep the one you or your family use most often and cancel the rest.
Make more meals at home. With some meal planning, eating at home and taking lunches to work is typically cheaper than eating out.
Give yourself a budget for non-essentials. Impulse buying can add up in a hurry if you do it all the time. Giving yourself a hard limit on frivolous spending can leave you more money for essentials and emergencies.
6. Increase Your Income
If you already run a very disciplined budget and still find yourself leaning on cash advances, it’s a sign that your income can’t support your lifestyle.
In some cases, this is a temporary situation. For example, say that your car dies unexpectedly. If you must replace it in a hurry, that can throw your finances into turmoil.
In other cases, your expenses just exceed your income. Both situations call for increasing your income.
You can look for a part-time job in the evening. You can also look for freelancing opportunities that play to your skills. You can even look at starting a home-based business, like doing yard maintenance on the weekends.
7. When Should You Use a Credit Card Cash Advance
Despite the many pitfalls, a cash advance can serve the occasional purpose in an emergency. While rare, you can still run across businesses or services that don’t accept credit cards or only accept cash.
If you find yourself stranded somewhere with only a credit card, a cash advance can make sense. For example, an independent tow truck driver might not have a way to accept a credit card. You need the tow to the nearest dealer or garage and the driver needs payment.
If you run the risk of an overdraft fee from your bank or a payday loan is the only other choice, a cash advance can prove cheaper.
Parting Thoughts on Getting a Cash Advance
Getting a credit card cash advance is rarely in your best interest.
You get hit with lots of fees. The interest rate is high. You get no grace period.
Under normal circumstances, it’s better for you if you look for ways you can trim spending or increase your income.
There are a few times when a cash advance makes sense, such as an emergency or when the alternatives will prove more expensive.
Looking for more advice on using your credit cards more effectively? Check out our post on the worst credit card mistakes to avoid.