What Is a Cash Advance and How Does It Work?

What Is a Cash Advance and How Does It Work? loading="lazy"

When you're facing an unexpected expense your bank account can't handle, one way to come up with extra cash is by getting a cash advance on a credit card. A credit card cash advance is essentially a short-term loan provided via your credit card, and there are several ways to get one. But cash advances can be a pricey way to pay for financial emergencies. Find out how cash advances work and how to decide it's a good option for you.

How Does a Cash Advance Work?

Most credit cards let you borrow a set amount of cash as an advance that you pay back with interest. Generally, you can only borrow up to your card's cash advance limit and not your full credit limit. To find your cash advance limit, check your credit card statement or contact the credit card company.

When you take a cash advance, it gets added to your credit card balance and accrues interest until it's repaid just like purchases and balance transfers do. The annual percentage rate (APR) you're charged for a cash advance may not be the same as your APR for purchases, and you can find it on your credit card agreement or by contacting your card issuer. Unlike purchases, there's no grace period on cash advances—they begin accruing interest as soon as you borrow the money.

There are several ways to get a cash advance:

  • In person: Take the credit card to your bank or credit union to request a cash advance. In addition to any fees and interest your credit card company charges, the bank or credit union may charge a separate fee.
  • At the ATM: If you have a credit card PIN, you can visit an ATM and enter your PIN to withdraw cash. ATMs generally restrict how much money you can withdraw per day, so this only works if the amount you need is under that limit. If you don't have a credit card PIN, contact the credit card company to request one. Some card issuers will text or email you a new PIN to use right away, but most send your PIN by mail, which can take three to 10 business days.
  • Online: If you have an account with the bank that issued the credit card, you may be able use the bank's website or mobile app to request a cash advance transferred into your account.
  • Convenience checks: Some credit card issuers provide convenience checks you can use for cash advances. Make out the check for the amount you want and cash or deposit it at your bank or credit union.

Common Cash Advance Fees

Credit card cash advances usually come with high fees. Read your cardholder agreement to learn how much a cash advance will cost you before you consider borrowing one.

Here are the typical fees to expect:

  • Cash advance APR: This can be much higher than the regular APR charged on regular purchases.
  • Cash advance fee: A common fee is 5% of the amount advanced or $10, whichever is higher.
  • ATM or bank fee: Banks, credit unions or ATMs may charge a cash advance fee separate from the credit card company's fees.

Regular credit card purchases give you a grace period to repay the balance before interest starts accruing that typically lasts from the last day of your billing period to the date your payment is due. You don't get this luxury with cash advances; interest begins accruing the day you receive the cash advance.

When you get a cash advance on a credit card with an outstanding balance, your payments may be used to repay the purchase balance (which has a lower interest rate) before being applied to the cash advance balance (which has a higher interest rate). Contact your card issuer to find out.

If you have several credit cards, minimize the cost of a cash advance by using the card with the lowest cash advance APR and not using a card with a high balance.

How a Cash Advance Impacts Your Credit Score

A cash advance doesn't directly affect your credit score, and your credit history won't indicate you borrowed one. The cash advance balance will, however, be added to your credit card debt, which can hurt your credit score if it pushes your credit utilization ratio too high. This ratio reflects how much of your available revolving credit you're using. A high ratio can hurt your credit score, especially once it climbs above 30%.

A cash advance could also ding your credit if taking on high-interest credit card debt makes it harder to stay on top of your bills. On-time payments are a major factor in your credit score; falling behind on payments could have a significant negative effect.

Better Alternatives to a Cash Advance

A cash advance should be a last resort for a financial emergency. Instead, consider.

  • Borrowing from friends and family: You may be able to borrow from a family member or close friend to cover your emergency. Always write up a loan agreement and repay the loan.
  • Lending circles: Lending circles are small groups of individuals that pool money and lend it to group members, often at low or no interest. Mission Asset Fund is one organization that facilitates lending circles; community organizations or nonprofits in your area may offer others. If a lending circle reports to the three consumer credit bureaus (Experian, TransUnion and Equifax), paying off their loan could help improve your credit score.
  • Debt consolidation loans: Debt consolidation loans are personal loans used to consolidate debt, such as high-interest credit card balances, into one new loan. Getting a debt consolidation loan at a lower interest rate than your existing debt reduces your payments, making it easier to save for emergencies or pay down debt. You're more likely to qualify for a debt consolidation loan if you have a good credit score.

When to Take a Cash Advance

When you need cash in a hurry, a cash advance on your credit card may seem like the perfect solution. But cash advances come at a price, so don't rush into this decision without assessing all other alternatives.

If you decide a cash advance is your only option, make sure you understand all the costs involved. Then develop a plan to repay the advance quickly and ensure that the extra debt doesn't hurt your credit score.