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Fast cash can be tempting, especially if you're in a bind. When you need cash right away because a vendor doesn't accept credit cards, or you don't have enough money in your bank account to pay for a cash-only purchase, a cash advance may seem like the perfect solution.
But while getting a cash advance is relatively simple, paying it back can be a lot more difficult. Not only will you face significant fees and high interest rates, but your credit could potentially take a hit. If you're considering this route, you need to understand the associated costs.
Here's what you should know before taking out a cash advance.
What Is a Cash Advance?
A cash advance is essentially a short-term loan provided by a credit card. Most credit cards allow you to use your card to get a certain amount of cash—usually a few hundred dollars but sometimes up to a couple thousand dollars—at an ATM or bank, similar to how you'd use a debit card. But that's where the similarities end. Unlike with a debit card, your credit card company will typically charge interest and fees on the amount you take out as an advance.
How to Get a Cash Advance
Getting a cash advance isn't difficult. Here are your primary options:
- In person. Simply show your credit card and ID at your bank or institution to receive a cash advance. The bank may charge you a fee for the advance, which is separate from the fees and interest your credit card company will charge.
- At an ATM. Insert your credit card, enter your PIN and receive your cash. If you don't have a cash advance PIN, call your credit card issuer to get one. Note that if you didn't receive a PIN with your credit card when you first got it, it may take a few business days to get one. So if you anticipate having future cash advance needs, request a PIN as soon as possible.
Also, keep in mind that most ATMs will limit you to a certain dollar amount or number of transactions per day. If you need to withdraw more than a few hundred dollars, it may be best to go into the bank and get your advance in person.
- With convenience checks. Many credit cards provide convenience checks you can use to make cash advances easy. You fill out a convenience check the same way you would a regular check, then cash or deposit it at your bank or credit union.
How Much Does a Cash Advance Cost?
Credit card cash advances usually come with a steep price tag. Typically you'll pay more interest than you would on a standard purchase—sometimes up to six percentage points more.
Interest rates aren't the only way cash advances can rack up costs. Here are other costs you might incur depending on your cardholder agreement:
- Your credit card may charge upfront fees of $20 or more each time you take a cash advance.
- The bank or credit union where you get the cash advance may also charge service fees.
- With a cash advance, interest charges often begin accumulating immediately, without the benefit of the one-month grace period you get to repay regular credit charges before they are hit with interest.
- If you take out a cash advance on a card that already has an outstanding balance, your payments may be used to repay the purchase balance (at its lower interest rate) before they are used against the costlier cash advance balance.
Does a Cash Advance Impact My Credit Score?
A cash advance from a credit card doesn't show up as a separate item on your credit report, but it can hurt your credit score if it pushes your credit utilization ratio above 30%. Credit utilization ratio is the amount of debt you currently owe on your revolving credit accounts (such as credit cards) divided by the total amount of revolving credit you have available. To stay in good standing with lenders, you need to keep your credit utilization ratio under 30%.
Alternatives to Cash Advances
If you're debating whether a cash advance is right for you, consider these alternatives:
- Friends and family. If you can borrow needed cash from a loved one, be sure to create a formal agreement to repay the loan—and stick to it.
- Lending circles. A form of friends and family borrowing, lending circles allow you to borrow money for little to no interest, and may even help you build your credit. Mission Asset Fund, a nonprofit based in San Francisco, provides lending circles and reports to the three credit bureaus (Experian, TransUnion, and Equifax) to help users improve their credit scores.
- Payday loans. These short-term loans can cover your cash needs until you get your next paycheck—at a steep cost. Payday lenders typically charge hefty fees as well as triple-digit annual percentage rates (APRs). They can be difficult to repay and can end up getting you into more trouble if you're not careful. As such, consider payday loans as a last resort.
- Debt consolidation loans. This alternative to a payday loan can help you keep more cash in your pocket each month to help eliminate the need for a cash advance. Debt consolidation loans consolidate your existing debt into one new loan, allowing you to make one monthly payment instead of many to several different lenders.
Managing Cash Advances
If you determine using a cash advance is your best option for getting money quickly this time, keep these tips in mind:
- Read all cardholder agreements carefully so you know the costs associated with cash advances.
- Try to avoid taking a cash advance on a card with a high balance.
- If you have more than one card that offers cash advances, choose the one with the lowest cash advance interest rate or the one that you can pay off in full most quickly.
- Get your free credit score so you'll be aware of any drop in your score that follows a cash advance, and pay down the debt as quickly as possible to hasten your score's recovery.
- Try to avoid the need for a cash advance next time by creating an emergency cash fund in an account that's accessible via check or debit card. ATM and check-cashing fees may still apply when you're far from home, but you'll avoid the more troublesome interest charges that cash advances incur.
A cash advance can be a good solution when you need cash quickly. Just use it wisely so you can avoid getting squeezed.
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Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.