If you’ve read the terms and conditions for any credit card, you’ve likely see something about cash advances, specifically a cash advance APR and a cash advance limit. While it may be foreign to some, cash advances are not a new concept for credit cards or charge cards. To help you understand how a cash advance works, we dig into what a cash advance is, how you can complete one, why negative stigmas surround cash advances and alternative options to consider before you complete a cash advance.
What is a cash advance?
A cash advance, also referred to as a credit card advance, is when you borrow money against your credit card’s line of credit — it essentially acts as a short-term loan. There are usually three ways to complete a cash advance. First, you can withdraw cash at an ATM from your credit card (believe it or not, your credit card has a PIN connected to it). Next, you can ask a bank teller to complete it for you. Finally, you can use a convenience check that your credit card provider mails to you (note that you can write this check out to anyone, including yourself). It should be noted that your credit card has a preset cash advance limit that’s detailed on your statement. This limit is usually much lower than your credit limit — for example, your credit limit may be $1,000, while your cash advance limit is $150. The appeal with a cash advance is that you can get immediate cash, even if it’s just a small amount, but there are a number of downsides to completing this type of transaction.
Why is there a negative stigma surrounding cash advances?
There is a negative stigma surrounding cash advances because, frankly, they’re expensive to complete — they are usually compared to payday loans. While they are not quite the same as a payday loan, they do have their own APR (separate from your purchase APR), which sits much higher than a credit card’s purchase APR — it will be detailed on your statement. For example, you may have a purchase APR of 15%, while your cash advance APR sits at 23%. Additionally, cash advances generally accrue interest immediately, which means you’ll have to pay it off the same day you take out the cash if you want to completely avoid interest. On top of that, you will be charged a fee for cash advances. This fee usually ranges from 3% to 5% of the total transaction, which doesn’t seem like much but when you also consider the fact that you will pay interest essentially right off the bat, everything really adds up.
Another reason why cash advances have a bad reputation is because they have the ability to negatively impact your credit scores. Even though cash advances have a limit, that’s much lower than the overall credit limit, the fees associated with a cash advance can help boost your used credit limit really quickly, which increases your credit utilization ratio — or a comparison of your total used credit to your total available credit. If you don’t already know, your credit utilization ratio is included in the amounts owed aspect of your credit scores, meaning it helps make up 30% of your scores. It is calculated by dividing your total used credit (or debt) by your total credit limits. For example, if you have one credit card with a $250 balance and a $1,000 credit limit, you would have a credit utilization ratio of 25% — lenders like to see this under 30%. If you take out a $300 cash advance on that same credit card and get charged $100 in fees, your credit utilization ratio will jump to 65% (a $650 total balance divided by a $1,000 limit) and have some negative influence your credit scores. Note that purchases can also have the same impact on your credit utilization ratio, but since cash advances have more fees and a higher APR than a purchase, they will have a greater impact — meaning a $200 cash advance (not including fees) will have more impact than a $200 purchase.
The final reason why there is a negative stigma surrounding cash advances is lenders usually do not view them as a positive thing. Similar to payday loans, cash advances are oven viewed as a last resort option that you take when you’re somewhat desperate for money, which means if you do complete a cash advance, you may have to face some consequences after the fact.
Alternatives to cash advances
Since cash advances are never a really good idea, it’s in your best interest to completely avoid them. Although there isn’t a one-size-fits-all solution for someone to get cash when they need it, there are a couple of other options you should consider before you sign onto a cash advance.
1. See if you can pay with credit. Even though it may not be your first option (and sometimes uncomfortable to ask), it never hurts to find out if you can pay with credit. You may be surprised how many individuals, debt collectors, businesses and more accept credit as a payment option, especially with payment apps like Venmo and Snapchat’s Snapcash. After all, the worst they can tell you is “no, we don’t accept credit,” and as we noted above, making a payment with a credit card is cheaper than getting a credit card cash advance.
2. Take the cash from a savings account. This is probably a not-so-favorable option for some, but it may be a cheaper and easier option to get cash. While it may set you back a bit on building your savings or cost you a fee if you take from a certificate of deposit or investment account, it may be a better alternative to completing a cash advance. If your cash is locked up in a CD or investment account, you’ll need to determine if the penalty fees you’ll pay to get the funds will be worth the one-time withdrawal and cheaper than a cash advance. Also, it should go without saying, but this is not an option you should utilize frequently, and if you find yourself having to do so, you may want to reevaluate your budget.
3. Consider a personal loan. Another option that you should really think over is a personal loan. While it does have the potential to be cheaper than a cash advance and provide you the opportunity to put cash in your pocket, you should be aware that not all personal loans are cheaper than cash advances. The cost of the personal loan will depend on the loan’s terms, which you agree to after you’re approved. That said, a loan can add some diversity to your credit reports and allow you the flexibility to pay it off over time with regular, consistent payments. Something else you’ll want to know is that the lender will likely ask you to provide a reason for getting a loan — be aware that not all lenders fund loans for all purposes, meaning if you need the cash for a house repair, you will want to find a loan for such a purpose. You may also be better off choosing a personal loan service over a loan from a traditional bank because usually these services can provide funds quicker.
Credit cards can be confusing, especially when it comes to an aspect that you may not use often. Follow our credit cards blog to learn more about credit cards and how they function.