How to use a cash advance on a credit card

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Quick access to cash can be a lifeline in times of financial emergencies or unexpected expenses. There are several ways to get cash quickly if you’re low on cash, one of them being a credit card cash advance, which lets you use your card to get a cash loan. short term at a bank or ATM.

But you have to be careful: credit card cash advances are very expensive.

You borrow against your credit limit to put money in your pocket, usually at a higher interest rate than on regular credit card purchases. And you will usually have to pay transaction fees as well.

“I suspect this happens mostly in an emergency, or it’s just a really bad choice for an inexperienced consumer,” says Mike Sullivan, personal financial consultant at Take Charge America, a national agency for non-profit credit counseling and debt management.

“But it’s almost always a bad decision.”

The best way to avoid taking on more debt is to know exactly what you’re getting into. Here’s everything you need to consider before taking out a cash advance.

How does a credit card cash advance work?

A credit card cash advance is similar to withdrawing money from an ATM with your debit card, except the money comes from your credit card instead of your checking account – and you have to pay it back.

“It’s technically a loan,” says Todd Christensen, financial adviser and education manager at the nonprofit debt relief agency Money Fit by DRS. “You withdraw money that you will have to pay back with a high interest rate, usually 25% to 30%, with no grace period.”

The process for getting a credit card cash advance is simple. You can enter your credit card PIN at an ATM — it’s different from your debit card PIN — or use a convenience check sent by your credit card issuer to withdraw money from a Bank. There are limits to the amount you can withdraw, usually between 10% and 40% of your total credit limit.

Pro tip

If you have no choice but to take a cash advance on your credit card, you can minimize accrued interest by paying off the balance as quickly as possible.

Unlike a payday loan, this type of advance is linked to your credit card and you can pay it back over an indefinite period, provided you make minimum payments. However, making only minimum payments will cost you money over time because the interest rate for credit card cash advances is so high.

Costs of a credit card cash advance

Before going ahead with a credit card cash advance, there are several costs to consider:

  • Interest charges: When you take out a cash advance, the bank adds interest to the amount you withdraw. As a rule, interest begins to accrue immediately. The average interest rate for a cash advance is nearly 25%, according to recent data from CreditCards.com.
  • Cash advance fees: These are the fees you have to pay to withdraw money from your credit card. This is usually 5% of the transaction or $10, whichever is greater.
  • ATM fees: These fees may vary. They can vary between $2.50 and $5 or more, depending on the ATM you use. It won’t cost you anything if you use your bank’s ATMs. But any transaction made with an out-of-network ATM will usually incur fees.

Let’s say you withdraw $200 from an ATM using your credit card. Upfront, you will pay a cash advance fee of $10 (5% of $200). You may also have to pay ATM fees, which can cost up to $15 just to get the cash advance. And you’ll start earning interest immediately at, say, 24%. If you don’t pay your bill by the first statement after your withdrawal arrives, you’ll owe about $48 in interest.

Repay the balance of a cash advance

If you’re already struggling with credit card debt, a cash advance can plunge you into a deeper hole.

Let’s say you have a balance of $2,000 on your credit card and your card charges an interest rate of 18%. Then, you decide to take out a cash advance of $300, which can be accompanied by 25% interest.

Minimum payments generally apply to the balance with the lowest interest rate (in this case, your previous balance of $2,000). So, if you only pay the minimum, your cash advance debt could quickly swell. It could take months or years to pay. You will also spend a lot on fees and interest.

That’s why it’s essential to read your credit card agreement before making a cash advance. If you decide to take out a cash advance, take only what you need and pay it back as quickly as possible.

Alternatives to credit card cash advances

If you’re considering a cash advance, it’s likely a sign of a bigger financial problem. It might be time to align your budget and spending habits.

Sullivan says people who take cash advances are more likely to default on credit card debt, which is part of why cash advance interest rates are so high.

You can avoid the need for a credit card cash advance in the first place by planning ahead. It is recommended that you regularly contribute part of your income to an emergency fund, in case you are faced with unexpected expenses.

“If your credit is good enough that you have plenty of available credit and can get a cash advance on your card, you probably have better options or can access another form of borrowing that will cost you a lot less. “Sullivan says.

Work with your credit card issuer

For many people, credit cards can be a source of relief when money is tight. But credit card debt can also add up quickly and lead to long-term financial problems. If you’re having trouble paying your credit card bill, contact your issuer as soon as possible to discuss your options.

During the coronavirus pandemic, many credit card issuers have been more willing to accept flexible payment terms, such as deferring minimum payments, waiving late fees, and credit line increases. This can help free up money for other necessities.

There are also credit card payment plans that may be available on any of your cards. For example, major issuers like American Express, Chase, and Citi offer these more flexible financing options on existing lines of credit. Some of the benefits are lower interest rates and more clearly defined repayment schedules.

Consider a personal loan

If you have good credit, getting a personal loan from a bank or credit union is probably cheaper than a credit card cash advance. Credit union interest rates tend to be lower. Research your options and consider speaking with a representative to see which personal loan would best suit your financial situation.

Borrow from friends, family or yourself

It may seem inconvenient to ask relatives or friends for a free or low-interest short-term loan, but it could save you a lot of money in the long run. Know that it’s okay to ask for help, as long as you’re honest about your situation. If you’re not keen on borrowing from friends or family, you can also consider borrowing from yourself through your 401(k) plan. Under the CARES Act, getting a 401(k) and paying it off on time isn’t the worst option if it’s done for the right reasons.

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