What Is a Cash Advance?

Credit cards are used primarily for in-store and online purchases, but did you know that some also allow you to take a cash advance? It’s a fast and easy way to access cash when you need it or when a credit card swipe won’t do. However, cash advances come at a cost that may outweigh the benefits of tapping into your available credit line to secure cash. 

How Cash Advances Work 

Cash advances are similar to withdrawals from your debit or ATM card. However, the funds will result in a loan that you’ll have to repay to the credit card issuer. Here’s how to take a cash advance from your credit card: 

  • Find the nearest ATM. If your credit card issuer happens to be a large financial institution, it may be worthwhile to use one of their ATMs or a machine in their network. Doing so may minimize transaction fees and the chance of having trouble securing the cash you need. 
  • Insert your card and input your personal identification number (PIN). You should have received a unique PIN a few days after the card arrived in the mail. But if you haven’t yet received your PIN, visit your online dashboard to see if you have the option to retrieve or set it there. Another option is to give the credit card issuer’s customer service hotline a ring as they may have an automated option that allows you to set a PIN that can be used right away.
  • Select “withdrawal” and enter the amount you wish to withdraw. Some cardholders only allow you to advance a percentage of the available credit, so it’s a good idea to inquire before heading to the ATM. That way, you won’t be in for a surprise when your transaction doesn’t go through.

Prefer not to visit an ATM or don’t have a PIN for your credit card on hand? You can walk into a branch and request a cash advance at the counter by presenting the credit card, your driver’s license, and another form of identification. 

You should aim to repay the advance along with any fees before your next statement rolls around. Otherwise, you could find yourself paying an excessive amount of interest on funds you borrowed over time.

To illustrate, assume your credit card issuer charges the greater of $5 or 8 percent each time you take a cash advance. Your credit limit is $2,500 (with an APR of 24.99 percent), and you have 100 percent available to you since you recently paid off the balance. But an emergency arises and you don’t have any money saved, so you take a cash advance of $500. 

You have every intention to pay the $500 plus $40 fee back immediately. However, you encounter another financial emergency and can only afford to meet the $25 minimum payment. Assuming you’re unable to accelerate repayment, it’ll take 29 months to eliminate the outstanding balance, and you’ll pay $184.74 in interest. So, a $500 loan will cost you $724.74. 

Drawbacks of Cash Advances 

Cash advances may seem convenient when you’re running low on funds and want to partake in festivities that require cash, but they’re not without drawbacks. Not only are cash advances an expensive way to borrow money, but you run the risk of racking up more debt if you’re already running a deficit and are unsure of when you’ll be able to get back on track.  

How so? Unlike purchases made with credit cards, cash advances begin accruing interest right away as no grace period applies. Plus, you’ll be responsible for a cash advance fee, as mentioned in the example above, but you’ll be paying interest on top of interest until you’re finally able to pay the loan in full. And keep in mind that you’ll also be subject to ATM fees if you make a withdrawal outside of your financial institution’s network. 

Planning to advance cash from a credit card that offers points, cashback, or other incentives each time you make a purchase? Unfortunately, the amount you withdraw will not be eligible for rewards although the funds will subsequently be used to make a purchase. 

Also, keep in mind that cash advances count against your daily spending limit. So, if your available credit is $2,000 but your daily spending limit is $500 and you advance $300 to cover a night out on the town while traveling abroad, you’ll only have $200 at your disposal. And if you happen to exceed your credit limit, you could incur even more fees. 

Should You Take Out a Cash Advance?

There’s no right or wrong answer to this question. If you need fast cash and have no other options beyond payday or no-credit-check installment loans, a cash advance could be the better option if you can’t afford to repay the loan right away. But if you’d prefer to pay cash instead of using your credit card but the merchant will accept credit cards, it may be more sensible to swipe away to save yourself the cash advance fee. 

The Bottom Line

Cash advances can help you get over a financial hump in a jiffy. But if you have available credit, it may be cheaper to use your credit card to cover financial obligations you can’t afford to pay for out of pocket. 

Either way, you want to repay what you borrow or charge to your card as soon as possible to avoid paying interest on top of interest over time. And if possible, start building a cushion so you won’t have to resort to cash advances the next time money’s tight.