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Updated on Tuesday, March 13, 2018
Getting a cash advance from your credit card can seem like a convenient way to receive needed cash, but it often comes with additional fees and higher interest rates than what would apply to typical purchases you make on your credit card. Before you decide to request a cash advance, make sure you’re aware of the associated charges and alternative options.
What is a cash advance?
A cash advance is when you borrow cash against your line of credit on your credit card, usually for a short period of time. Typically, you can request the money at an ATM with your credit card and a cash advance PIN, in person at a bank or with convenience checks you make out to yourself and cash. Although relatively easy to obtain in emergencies, cash advances typically have more fees and higher APRs than purchases, and can be a costly way to borrow money long term.
Why are cash advances separate from purchases?
Banks treat cash advances differently than most other transactions made with your credit card. Most notably, cash advances on average are more expensive than purchases, and come with more fees and higher interest rates.
To determine the common features of cash advances and how they differ from purchases, we looked at the cash advance and purchase terms from the major credit card issuers and summarized them below.
Here are some key differences between cash advances and purchases:
- APRs: The APR you’re charged for a cash advance is most often 5% higher than the APR for purchases, meaning you’ll have to pay more in interest with cash advances than if you have debt as a result of a purchase.
- Fees: The majority of credit cards have a cash-advance fee. This fee is a percentage of the amount of each cash advance and is often 3% or 5%. Meanwhile, purchases don’t have fees per transaction, unless you travel abroad, in which case some cards charge foreign transaction fees. Cash advances may also charge a small fee — typically $2.50 or $5 — if you use an out-of-network ATM to withdraw the cash.
- Credit limit: You may receive a cash advance credit limit that is different than your credit limit for purchases. For example, a bank may give you a total credit limit of $5,000 but limit you to using $2,500 of it for a cash advance. However much you take out as a cash advance will be subtracted from your overall credit limit. So, if you use your maximum-allowed $2,500 cash advance, you’ll have $2,500 left for purchases.
- Grace period: Most cash advances do not have a grace period, unlike new purchases. This means that interest is charged from the date of your advance. What typically happens with a new purchase is you won’t be charged interest during the grace period — the time between when you make a purchase and your statement due date — but cash advances don’t work this way. You’ll incur interest charges as soon as you take out the cash advance.
Should I do a cash advance?
We get it, sometimes you’re in a bind and you need cash fast, but is a cash advance really the best choice for you? That depends on what you plan on using the cash advance for and how much time you’ll take to pay it off.
For time-sensitive or emergency situations in which paying with your credit card isn’t an option, cash advances can be a quick way to get cash and better than some alternatives like payday loans, which can drag you into a cycle of debt. However, other options like asking your employer for a paycheck advance or borrowing money from family or friends can be less expensive than a cash advance. If you aren’t in a rush for cash, you can look to better alternatives that may be even cheaper like taking out a personal loan. If you’re not required to use cash for whatever it is you need, consider using a credit card with a 0% APR intro period to spread out the cost of a purchase. These alternatives typically have more favorable rates and can save you money compared with cash advances.
If you decide that a cash advance is the best choice for you, make sure you pay it off as quickly as possible because you’ll most likely be charged a high APR and fees on your advance. Also, if your card already has an outstanding balance, it may not be a good idea to take out a cash advance because you’ll go further into debt.
Another key point to consider is credit card companies treat cash advances separately from purchases and may apply payments you make toward your balance to the debt differently. For example, Discover mentions in their terms and conditions:
“PAYMENT ALLOCATION: We apply payments and credits at our discretion, including in a manner most favorable or convenient for us. Each billing period, we will generally apply amounts you pay that exceed the minimum payment due to balances with higher APRs before balances with lower APRs as of the date we credit your payment.”
That means if you owe $1,000 in purchases at a 17% APR and $500 from a cash advance with a 25% APR, the payment you made would go toward the $500 cash advance.
On the other hand, some card issuers apply payments toward the balances with the lowest APRs first, and if that were the case, your payment would go toward the purchase balance of $1,000, while interest accrues more rapidly on the higher-APR $500 cash advance. Make sure you check your card terms to know what you’re getting into.
Cash advances can be a convenient way to get cash fast compared with other options, but be careful with the fees and terms provided in your credit card agreement. If you decide that you want to do a cash advance, check out credit cards that don’t charge a cash-advance fee and have a plan to pay off borrowed money as soon as possible.