Taking out a cash advance on your credit card is risky, expensive, and carries the potential for debt if you don't quickly repay it. Knowing that before you swipe your credit card at the ATM may help you make better decisions about the way you use a credit card cash advance.
Four Costs of a Cash Advance
Cash advances often come with fees - from one to four percent of the advance. In addition, cash advances have higher interest rates than regular purchases. Most credit cards don't provide a grace period for cash advances meaning interest starts accruing as soon as you take the cash from the ATM.
Don't forget about the ATM fee the bank charges you for using their machine.
Those four things can make cash advances extremely expensive, but still less expensive than some alternatives, like payday loans. Managing these fees is key.
Smart Ways to Handle a Cash Advance
Read your credit card agreement to understand the terms and fees. If you don't understand something, call a customer service representative and ask.
Use a cash advances for true emergencies, like unexpected medical expenses. Avoid taking out a cash advance to pay for ordinary everyday items like groceries and gas.
Know your cash advance limit. It could be less than your credit limit. Exceeding your cash advance limit will result in overage charges and higher interest rates.
Take out only what you need, nothing more. Avoid the temptation to withdraw just a little more so you have some extra money. That little extra will only make it harder to repay the advance.
Use a credit card with a $0 balance. If you have multiple types of balances on a credit card - purchases, cash advance, balance transfer - payments are applied to the lowest interest rate balance first. Meanwhile, the higher interest rate balance - your cash advance - continues to increase with finance charges. This make the cash advance more expensive and more difficult to repay.
Avoid purchases until the cash advance is repaid, for the same reason discussed above. You should also avoid making credit card purchases until you can afford them.
Cash Advance Alternatives
The need for quick cash is often symptomatic of a larger money management problem, like overspending or the absence of an emergency fund. In cases like these, repaying a cash advance could take a long time and cost a lot of money.
Before you decide to take out a cash advance, take a look at some alternatives.
- Small loan from your bank or credit union
- Small loan from a family member or friend
- Payday advance from your employer
- Due date extension from your creditors
- Consumer credit counseling
- Local emergency hardship programs (typically offered by your local human resource department)
Also see 15 Payday Loan Alternatives for ways to get quick cash or a low interest rate loan.
