What is a credit card cash advance?
A cash advance on your credit card may seem like a quick way to get money, but there are fees and risks to consider
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A credit card cash advance is a withdrawal of cash from your credit card account. Essentially, you’re borrowing against your credit card to put cash in your pocket. However, there are costs to taking a credit card cash advance and, in some cases, limits on the amount you can withdraw.
Here, Better Money Habits®asks Bank of America’s Jason Gaughan, SVP, Consumer Card Products, about the key considerations of a credit card cash advance.
How does a cash advance work?
“Let’s say you go to your bank or to an ATM and use your credit card to take out money. While the process may seem similar to withdrawing money with a debit card, what you’re really doing is taking a cash advance on your credit card,” says Jason Gaughan, SVP, Consumer Card Products at Bank of America. “Unlike a debit card withdrawal, in which you’re accessing your own funds, with a cash advance your credit card company is essentially lending you money and charging your account. The charge will likely cost you; cash advances generally have a transaction fee and a higher annual percentage rate (APR). Additionally, there’s usually a limit on how much cash you can get an advance on.”
Using your card for cash isn’t the only form of cash advance, though. Some credit card companies send customers checks in the mail. These “convenience checks,” as they are known, are linked to your account. If you deposit them, the transaction is considered a form of cash advance, which subjects you to the cash advance APR. You may also incur transaction fees.
Jason Gaughan | SVP, Consumer Card Products, Bank of America
With a cash advance, your credit card company is essentially lending you money and charging your account. The charge will likely cost you; cash advances generally have a transaction fee and a higher annual percentage rate.
When to consider using a cash advance
Cash advances can be an important source of funds in an emergency. Although you don’t want to plan on using cash advances regularly, you might use one if you are short on funds and unable to charge an expense. However, always be sure to consider all your options given the costs.
Why are cash advances so expensive?
It’s a good idea to consult your credit card agreement to make sure you know the rules and fees. Here are a few costs to consider:
You will pay a transaction fee for credit card cash advances.
The APR for cash advances is often higher than the APR for credit card purchases.
Cash advances often begin accruing interest at the time of the withdrawal, meaning there’s no grace period.
How to lower cash advance fees
Understand transaction fees
Some transaction fees are a percentage of the overall advance; in this case, you could limit the fee by withdrawing only as much as you need. Other transaction fees may be a flat rate or a combination of a flat rate and a percentage of the transaction. In this case, if you take all the cash you think you’ll need at once instead of conducting multiple smaller transactions, you’ll pay the flat fee only once.
Pay it off fast
Unlike standard credit card purchases, which offer a grace period between the purchase and the payment due date when interest kicks in, a cash advance transaction generally begins accruing interest immediately. That means paying off your cash advance in a timely manner is crucial to saving you money in the long-term.
Find a credit card with better terms
If you plan to take out a cash advance, you may want to look for a card with lower cash advance fees and a more competitive interest rate, as these can vary by issuer.
4 ways to avoid taking a cash advance
Make purchases with your credit card
You can often limit interest and transaction fees by charging purchases to your card rather than getting a cash advance.
Build an emergency fund
Occasionally, you’ll need to pay for an unexpected expense. Your emergency fund can help you cover unforeseen costs and avoid using credit card cash advances.
Monitor your balance
It’s a good idea to keep track of your account balance so that you’re not caught by surprise. If you bank online, you can set up text or email alerts to notify you if your balance drops below a set amount.
Avoid unnecessary purchases
Ask yourself if the purchase you intend to make with your cash advance is worth the extra fees or if it can wait.
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