Long before credit cards existed, people still borrowed money. It just worked differently.
In the United States, during the 1920s, individual firms, such as hotel chains and oil companies, began issuing credit cards to customers for purchases made at company outlets.
Nowadays, the average American has over $6,000 in credit card debt. Taking cash from credit cards is one benefit that every credit card user should understand.
Do you want to make sure you understand the effects of taking cash from credit cards?
Keep reading to learn 10 essentials about credit card cash advance.
1. It’s Different Than Withdrawing from Your Bank Account
Taking cash from credit cards is what people do when they need money. It’s not the same, however, as withdrawing cash using your debit card or simply making a purchase on your credit card.
When you withdraw funds from your debit card, all you’re doing is taking cash from the money that you’ve already earned, which is sitting in the bank in your personal bank account.
When you withdraw a cash loan from your credit card, you’re taking money from your future self, because you’re borrowing against what you’ll be earning in the future.
Credit card cash advances are essentially loans, and loans always come with a price.
2. A Cash Advance Is Much More Expensive
Regardless of how easy it is to take out a cash advance against your credit card’s credit limit, don’t do it unless it’s an emergency.
Cash advance interest rates are almost always significantly higher than your card’s interest rate for spending on your credit card. It won’t be as expensive as a payday loan no credit check, but you’ll definitely be paying more than a small personal loan.
If you do decide the emergency is worth it, pay that borrowed amount back as soon as you can.
The Interest Is Higher
As we mentioned earlier, it’s rare for cash advance interest not to be higher than purchase and balance transfer interest charges.
Say, for example, you spent $250 on concert tickets using your credit card, and then you took out a cash advance for $250 to pay for dinner later that evening. Even if you paid both types of payments on time, at the same time, you’d still pay more interest on the cash advance amount.
Plus, the longer you take to pay off a cash advance withdrawal, the more interest you’ll accrue in the process, and the more you’ll owe and have to pay back.
3. There May Be More Than One Extra Charge
A credit card cash advance is one of the most expensive forms of credit card transactions, especially because there is more than one charge.
There’s a Cash Advance Fee
First of all, there’s always a cash advance fee that’s charged each time you take out a cash advance. Sometimes this fee is a minimum flat rate, and sometimes it’s a percentage of the amount of which you’ve withdrawn.
For example, a particular credit card’s terms might state that the cash advance fee is either $5 or 4%, whichever number is greater. That means that the fee for a $200 withdrawal would be $8.
Typically, these fees range from 2 to 5% of the amount you withdrawal, but most charge around the higher end of that range.
There Are ATM Fees
On top of the cash advance fee we mentioned, you’ll also have to pay an ATM fee, usually somewhere between $2 and $5. The fee amount depends on which bank’s ATM you use.
Remember that you might even be charged 2 different ATM fees if the ATM’s bank AND your credit card issuer both charge an ATM withdrawal fee.
4. Pay Attention to Payment Allocation Rules
Did you know that by federal law, credit card issuers have to apply minimum payment amounts to account balances with the HIGHEST interest? However, any amount IN ADDITION to the minimum payment can be applied wherever the credit card issuers want.
Say you owe $8,000 on a particular credit card, of which $3,000 was racked up by taking out cash advances. Your minimum payment is around $250, but you make a $500 payment every month.
It might be the case that your credit card issuer only applies the minimum amount of $250 to the higher interest cash advance debt, but they apply the remaining $250 to the lower interest debt.
It’s an easy way for them to make more money. The longer you have debt with a higher interest rate, the longer it’ll take you to pay, and the more you’ll end up forking over in the long run.
5. There’s Rarely a Grace Period
Unfortunately, most credit card issuers don’t offer a grace period on credit card cash advances. What that means is that you aren’t allotted a full billing cycle to pay off the amount due in its entirety.
With normal credit card use, borrowers can use that grace period to pay back what they’ve spent, without accruing any interest or incurring a charge. But with a cash withdrawal on a credit card, the interest begins to accrue the moment the transaction clears.
The tip is that if it’s the only balance on your credit card, pay it off as soon as you can. Don’t wait until your bill arrives if you want to minimize earned interest on that money that you borrow.
6. You Might Need Financial Help
If you want to make good use of your credit cards, especially as it pertains to maintaining good credit, don’t ever use more than 30% of your available credit. Another good rule to live by is to make sure you don’t spend anything you can’t pay back at the end of the month.
If you’re in the position of needing a cash advance to pay a bill or get through the week, the chances are high that you need financial help.
One option to consider is consolidating your finances. Even if you have bad credit, you can still apply for a bad credit payday loan.
7. There Are Alternatives
There comes a moment in almost anyone’s life when they find themselves in a cash crisis. When you need that cash to keep your lights on or support a family, it doesn’t matter how high an interest rate is because, at the end of the day, you’d rather have the money than not.
But there are a few alternatives to consider if you do find yourself in that situation.
Borrow Money from Someone You Know
If you have a friend or family member you can ask for cash, do it. While it may be awkward, the savings will be worth it, and you might be able to work out a multi-payment payback situation.
Just make sure you make a plan with that person concerning how you’ll pay them back, and when. Both you and your lender will probably feel more comfortable knowing there’s a plan for repayment going forward.
Take out a Personal Loan
A personal loan isn’t always ideal, and if your credit isn’t great, it’ll probably be a little more expensive. That being said, it’ll still probably be LESS expensive than borrowing money from your credit card.
Overdrawing Your Checking Account
If it’s a small amount of cash that you need, think about overdrawing your checking account using your debit card. Even though you’ll face a fee, you won’t have to worry about paying interest, and many banks will waive a certain number of fees per year.
8. Make Sure You Create a PIN
When you get a debit card, you must set up a PIN before you begin using your card as debit or at an ATM. When you get a credit card, you won’t automatically receive a PIN, but you usually need one to get a cash advance.
If you do plan to use your card for cash, make sure you set up your PIN beforehand. And if you want to avoid cash advances altogether, don’t ever set up the PIN!
9. You Can Set a Limit for Yourself
Another way to avoid taking advantage of a cash advance is by setting a limit on your card. All you have to do is speak with your issuer and set your amount, to prevent yourself from taking any cash in the future.
10. It’s Not the Only Way to Get Cash Fast
Many people opt to withdraw cash from their credit cards, because they don’t think there’s any other way to get cash fast. But there are other ways. In addition to borrowing from a friend or overdrawing your account, you can also get a same day loan.
With a same day loan, you can apply for it and get cash on the same day. If the interest rate is lower for a same day loan, go for that rather than adding debt to your high-interest credit card.
Think Before You Take Cash from Credit Cards
Before you withdraw cash from credit cards, think about everything we’ve gone over in this guide. And at that moment, ask yourself if it’s worth it.
Can you manage for the remaining days until payday? Can you borrow from a friend or a family member?
If the answer is no, take what time you can afford to do some research. A personal loan might be the better, and less expensive option.