OppLoans Word of the Week: Cash Advance
Your car breaks down on a remote country road. (Don’t worry, this isn’t the beginning of a horror movie.) You manage to call a tow truck, but the driver insists on being paid in cash. He tows you to a gas station, where they have a cash machine. Unfortunately, it’s the day before payday and your bank account is basically 99 percent cobwebs. Looks like your only option is using your credit card and taking out a costly cash advance. Your budget is extremely tight as it is; is this added cost something you’re going to be able to handle? (Okay, we lied. This is a horror movie.)
What is a Cash Advance?
A cash advance is a way for credit card users to withdraw cash when they really need it. They come with much higher interest rates than standard credit card purchases and there is no grace period. That high interest starts accruing the moment the cash hits your hand.
How is a Cash Advance different than a regular credit card purchase?
When a person has a credit card, it’s basically like having a revolving line of credit that they can access directly. Any purchase they make using their card is added to their balance and begins to accrue interest at an average yearly rate of 15 percent. Luckily, people who closely track their spending and don’t spend more on their card than they can afford can avoid paying interest altogether. Pretty much all credit cards have a 30-day grace period before interest starts to accrue on a given purchase. If the person pays off their entire balance every month, their effective interest rate will be 0 percent.
With a credit card cash advance, the amount withdrawn is added to the card’s balance, just like with any credit card purchase. But that’s where the similarities end. Credit card companies charge higher interest rates on cash advances than they do on standard purchases. The average Annual Percentage Rate (APR) for a credit cash advance is 24 percent! That’s almost 10 percent higher than the average rate on a credit card purchase.
And the added costs don’t stop there. Credit card cash advances also don’t have that same grace period that standard purchases do. Not only are the interest rates higher, but that interest starts to accrue immediately. With a cash advance, there is no possibility of paying your balance off every month and paying 0 percent. Credit card cash advances also come with an added fee, usually 2 to 5 percent of whatever you withdraw. You can read more in The Hidden Dangers of Cash Advances.
- Konsko, Lindsay. “What is a Cash Advance?” NerdWallet.com. Accessed September 16, 2016. https://www.nerdwallet.com/blog/credit-cards/what-is-a-cash-advance/
- Mecia, Tony. “The high cost of credit card cash advances.” CreditCards.com. Accessed September 16, 2016. http://www.creditcards.com/credit-card-news/cash_advances-cost-rates-1276.php/
- Martin, Allison. “4 Dangers of Credit Card Cash Advances.” Credit.com. Accessed September 16, 2016. https://blog.credit.com/2013/10/4-dangers-of-credit-card-cash-advances/