It’s an awful feeling; your car needs to be repaired right now and the shop only takes cash. Or, your rent is due and your landlord won’t accept a credit card. Despite the convenience of credit cards, sometimes you must have the cash to cover emergencies. If your bank account is running low and you need money fast, using your credit card to take out a cash advance can sound pretty tempting. But before you do so, make sure you understand how cash advances work.
What Is A Cash Advance?
If you have a credit card, you likely have access to a cash advance, which allows you to take out a short-term loan to get quick access to cash. You have to pay a cash advance fee to borrow the money, even if you repay it quickly. People typically use cash advances when they need to complete a purchase, but the retailer doesn’t accept credit cards.
Taking out a cash advance is quick and easy; the process just takes a few minutes to complete. To get a cash advance, you can go to an ATM or you can visit a bank to request one.
The Things You Should Know Before Taking Out A Cash Advance
If you’re short on cash, a credit card cash advance can seem like the perfect solution to quickly getting cash back. However, cash advances can have significant drawbacks.
1. Cash Advances Have High APRs
The APR you pay for using your credit card to make new purchases is very different than the annual percentage rate you’ll pay for taking out a cash advance. According to CreditCard.com’s 2017 Credit Card Cash Advance Survey, the average cash advance APR was 23.68%. That’s nearly eight percentage points higher than the average new purchase APR of 15.79%. With such a high-interest rate, your balance can quickly balloon out of control and you’ll pay far more to the credit card company than you originally borrowed.
2. You’ll Have To Pay High Fees
In addition to the higher interest rate, you should also expect high fees when you take out a cash advance. The transaction fee is often a percentage of the amount you borrow — usually 2% to 5% — and that fee is added to your account balance. Depending on how much you borrow, that fee can add hundreds to your cost.
For example, the Chase Sapphire Preferred Card has a 5% fee for cash advances. If you took out $2,000, that means the amount of cash you’d be charged for a cash advance would be $100 to the credit card issuer. You owe that fee even if you repay the cash advance within 24 hours; it’s the price you pay to that financial institution for having immediate access to that money.
3. Cash Advances Don’t Usually Have A Grace Period
When you make credit card purchases, you’re generally subject to a grace period. The grace period is the number of days you have to pay off your bill in full before interest charges start accruing. However, the grace period for cardholders usually only applies to new purchases made with the card. According to the Federal Trade Commission, cash advances don’t typically have a grace period, so you’ll have to start paying interest right away. Interest can accrue rapidly, causing your balance to grow over time.
4. A Cash Advance Can Affect Your Credit Score
When you take out a cash advance, your cash advance balance is added to your credit card debt in the eyes of the three major credit bureaus: Experian, Equifax, and TransUnion. The cash advance will increase your credit utilization, which can negatively impact your credit score.
Alternatives To Cash Advances
Cash advances are expensive; you can end up paying hundreds in fees and interest charges. If at all possible, it’s a good idea to avoid them altogether. If you need money quickly, consider these alternatives before turning to a cash advance:
- Take out a personal loan: Personal loans tend to have significantly lower interest rates than credit cards and cash advances, so they can be a good tool for financing large purchases. With online lenders, you can usually get the cash you need in just a few days.
- Ask friends and family for help: If you have to pay a bill right away, consider asking friends or family for a short-term loan. Even if you pay it back with interest, it will likely be a far cheaper option than a cash advance.
- Request a paycheck advance: Some employers will allow you to get an advance from your next paycheck, putting money in your bank account right away. Contact your human resources or payroll department to figure out if this is an option for you.
- Sell items for cash: If you have any unused stuff around the house — such as clothes, books, electronics, or collectibles — sell them on Craigslist or the Facebook Marketplace for quick cash.
Using Cash Advances
If you need money quickly, a cash advance is one way to get the funds you need right away. However, taking out a cash advance on your credit card account is costly, and should be avoided except in serious emergencies. If you do have to use a cash advance, focus on paying it off as quickly as possible to avoid paying more in interest charges on minimum payments.
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