We’ve all encountered that awkward moment where we’re in front of a street food vendor or a parking attendant, and we don’t have any cash on us. Mobile point-of-sale systems and apps that let users send money back and forth have skyrocketed recently, but there still are plenty of instances where nobody wants to be caught without having cold, hard cash on them. The tempting thing to do may be to take your newly-acquired travel rewards credit card to an ATM and make a cash advance to withdraw what you need so you can pay for your hot dog or parking spot, but there’s a good chance the costs will outweigh the benefits.
What is a Cash Advance?
A cash advance is withdrawing physical cash against your credit card balance to pay for a good or service that can’t be paid for directly with a credit card. Taking out a cash advance against your credit card balance is very different from using a debit card at an ATM. Some cardholders may not know this but using a credit card to borrow cash to pay for something is more expensive than using a credit card to outright buy an item because of the extra transaction fees. Credit card companies treat cash advances differently than regular purchases, and they structure their interest rates differently with cash advances having much higher rates.
Are Advances Worth It?
Increased Interest Rates: Compared to purchase and balance transfer rates, cash advance rates are higher and have been known to top out near 27%. If the cash advance isn’t paid off immediately more interest can accrue over time, making that cash advance much more expensive as time passes.
Cash Advance Fee: Credit cards that offer cash advances charge a fee in the form of a fixed dollar amount or percentage of the transfer. They’ll usually charge either $5 or 3% of the amount of the cash advance, whichever is greater.
No Grace Period: Purchases made with a credit card typically have a 21 to 25-day grace period where cardholders have the chance to pay their full balance without accruing interest, but with cash advances, the balance immediately begins collecting interest.
No Introductory Rate Offers: Many credit cards offer special Introductory Rates such as 0% interest for up to 18 months on purchases and balance transfers, but they don’t do the same for advances.
ATM Withdrawal Fees: In addition to high interest and a fee, cardholders also must pay an ATM withdrawal fee to borrow cash. The credit card issuer may also issue an ATM fee.
Payment Allocation Rules: Cardholders who make the minimum payment will have it applied to the balance with the highest interest rate, but if the payment is above the minimum the credit card issuers can apply it to the lowest rate balance. This means it will take longer to pay off the balance.
What Are Some Alternatives an Advance?
Use Your Debit Card: Using your debit card at any ATM is a much better idea because even if you must pay an ATM withdrawal fee, you’ll save money on the Cash Advance Fee and the higher interest.
Borrow Cash: Find a friend or family member willing to lend you cash for your hot dog or parking spot, and offer to pay them back with a cash transfer app.
Take Out a Personal Loan: If you need to take out a more substantial amount of cash, consider looking into a personal loan with a friendlier interest rate. It’ll also give you more of a financial cushion to avoid needing to borrow more money.
Overdraw Your Bank Account: If payday is in sight, and you need some money to get you through a few days consider overdrawing your checking account. You’ll have to pay an overdraft penalty, but it’ll be substantially less expensive than paying a fee or interest, an ATM withdrawal fee, and a possible ATM fee from the issuer.
How Does an Advance Affect My Credit Score?
Using a credit card to take out a cash advance doesn’t directly affect your credit score, but there are ways in which it can have indirect consequences. The higher interest rates associated with credit card cash advances only make it more difficult for cardholders to pay off their balance in full and get out of credit card debt if they’re having trouble financially. If they default on their credit card payments or fall behind on payments it will have a negative impact on their credit score. The only way for cardholders to have their credit scores not be negatively affected by taking out a cash advance is to immediately pay it back.