How Are Cash Advances Different from Regular Credit Card Transactions?
Cash advances let you use your credit card to take out paper money—which can be handy—but the extra costs for doing so are going to add up fast.
Credit cards can be a great tool to help people earn rewards, manage their monthly cash flow, and maintain their credit score. However, they can also be a really great way for people to spend far beyond their means, rack up excess debt, and send their credit score plummeting. It all depends on how you use them!
Credit cards can also be used to take out paper money using a cash advance. And while the differences between a cash advance and a regular credit card transaction might seem pretty straightforward, it’s actually a bit more complicated than that—and a great deal more costly.
Here’s how credit cards work.
Credit cards work much like a traditional line of credit (LOC). Instead of taking out a set sum of money, as you would with a personal loan, a LOC gives you a set amount of money that you can borrow up to and then lets you withdraw funds at your own discretion. You are only charged interest on the funds that you actually withdraw.
With credit cards, the terminology works like this: The total amount you can borrow is referred to as your “credit limit” and the amount you’ve withdrawn is referred to as your “outstanding balance.” Every time you use the card to make a purchase, funds are added to that outstanding balance up to the total credit limit.
Credit cards have a “revolving” balance, which is an important distinction from some other LOC products. A revolving balance means that the amount you can borrow against your credit limit replenishes every time you make a payment.
For example: If you borrow $1,000 on a credit card with a $3,000 limit, you then have $2,000 left that you could borrow in the future. But if you pay that $1,000 off, you would then have the full $3,000 left available to you for future use.
Cash advances have a separate credit limit.
When you make a purchase on your credit card, not physical money changes hands. The merchant receives the funds for your transaction electronically, and that same amount is then added onto your card’s outstanding balance.
But if you absolutely need paper money, you can use your card to get cash. All you need to do is go to an ATM and use your card to make a withdrawal. While some credit cards might not have cash advance features, they are very common.
However, if you’re looking to borrow a lot of cash using a cash advance, you might run into trouble. Cards that have cash advance features have a separate, lower credit limit for how much you can withdraw in cash.
While these credit limits vary from card to card (and user to user), they’re often set as a percentage of your total credit limit. The higher your total limit, the more cash you can withdraw. As credit limits are oftentimes related to your credit score, bad credit borrowers might find themselves at a disadvantage.
Cash advances are way more expensive.
Then again, just because you can withdraw all that cash doesn’t mean you should. For one thing, you should refrain from spending beyond your limits on a credit card, regardless of whether you’re using cash or credit. Plus, the lower you keep your balances, the more it will help your score.
But if you find yourself facing an unforeseen bill or emergency expense and absolutely need to put the charge on your card, you should opt for credit instead of cash. Why? Because credit card cash advances are much more expensive than regular transactions.
To begin with, there are the interest rates: Cash advances almost always come with a separate, higher rate than regular transactions. Check your cardholder agreement to see what the cash advance APR is for your particular card.
Second, most credit cards come with a one-month interest-free grace period for normal transactions. If you pay off the transaction within that period, you don’t have to pay any interest at all! With cash advances, on the other hand, there is no such grace period; interest will start accruing the second that transaction is added to your balance.
Lastly, there are the fees. Not only do most cards charge you a cash advance fee purely for making the transaction—oftentimes, it’s two to three percent of the amount withdrawn—but you’ll very likely have to pay an ATM fee on top of that other charge.
If you find yourself in the middle of a true cash-only emergency, a credit card cash advance can be useful. But otherwise, they’re much too expensive to be worth it.
They’re still better than cash advance loans.
While we don’t recommend credit card cash advances in any situation that doesn’t absolutely demand one, we also can’t deny that they are a far better option than short-term cash advance loans like payday loans or title loans.
The high-interest rates for credit card cash advances aren’t great, but they are far preferable to the astronomical APRs for payday cash advance loans, which average almost 400 percent. (Title loans, which put you at risk of losing your car or truck, have an average APR of 300 percent.)
Due to their high rates, their short terms, and their lump-sum repayment structure, no credit check loans such as these can be difficult for consumers to repay on time, which can lead them down the slippery slope towards a debt trap.
If you are unable to use a credit card cash advance to cover a surprise bill and you need to take out a bad credit loan, you should look into possibly taking out an installment loan that will provide you with more manageable payments.
But the best method to protect your money in situations like this is to maintain a well-stocked emergency fund. That way, you won’t need to take out any loans or cash advances at all! To learn more about you can improve your long-term financial situation, check out these related posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- From Budget to Baller: 6 Tips to Grow Your Money
- Save More Money with These 40 Expert Tips
- 8 Good Habits to Get Your Finances—and Your Life—on Track
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