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How to Calculate the Cost of Your Cash Advance
Using a credit card can be a very smart decision if you do so responsibly. In fact, there are actually many benefits to sensible credit card utilization: you can use them to up a bad credit score, earn cash back and signup bonus rewards, and even finance major purchases without interest during introductory periods.
However, credit cards can be a double-edged sword. One side has the ability to pull you out of a bad credit slump and improve your financial life, and the other can tank your credit score, and put you in a cycle of debt that could take years to get out of. It all depends on how you use it!
According to the Federal Reserve of New York, total U.S. credit card debt rose by $26 billion in 2017's fourth quarter and is currently sitting at a whopping $834 billion. That's a lot of debt on a lot of credit cards!
And OH BOY are there quite a few ways to use a credit card poorly, as many Americans know all too well. While we all know that racking up a balance you can't pay off and maxing out your cards is bad for your financial health, one of the most expensive things you can do with a credit card—taking out a cash advance—isn't usually the first thing that comes to mind when you think of irresponsible credit card habits.
But the reality is, credit card cash advances can cost you some serious coin.
What is a cash advance?
A 'cash advance' can mean several different things. (For all of our information on cash advances, you can check out the OppU guide What is a Cash Advance?)
First, there are cash advance loans, which are essentially payday loans by another name. These short-term, high-interest, no credit check loans are offered by many predatory lenders looking to make a buck off your back.
In order to get one, you'll typically write a check to the lender—dated on your next payday—for the amount of your loan plus interest, and in exchange, the lender will give you the cash you need.
On your next payday, the lender will cash your check, and if you don't have enough money in the bank to let that check go through, you'll be stuck in a rollover cycle of debt, paying insanely high interest rates on what's typically a relatively small amount of money.
Second, there are employer cash advances. Not all employers offer them, but if yours does, you can request to receive a portion of your paycheck early. These kinds of cash advances typically don't carry any interest, as you're only getting money that's yours a few weeks before you normally would.
In contrast, credit card cash advances are a whole different beast and a pricey one at that. While not quite as expensive as taking out a cash advance loan, credit card cash advances come with often hidden fees and interest.
Essentially, when you take out a credit card cash advance, you're using your credit card in the same way you would a debit card. You can go to an ATM or bank, and use your credit card to withdraw cash.
The difference between using a debit card to get cash and using a credit card to get cash? When you use a debit card, the money you're taking out is already yours. But when you use a credit card to get a cash advance, that money isn't coming from your bank account.
Every single time you use a credit card, you are taking out a small loan from your credit card company. If you pay back those loans in full every month, you can usually avoid paying interest on them.
But you can't avoid paying interest on a cash advance.
How much does a cash advance cost?
Not every credit card company allows cash advances, and for those that do, the rates can vary wildly. According to the New York Times, the average APR for a cash advance hovers at around 24%, nearly 10 points higher than the average rate for a regular credit card purchase, which is around 16%.
Additionally, while most credit cards offer a grace period in which you can pay off your balance without paying any interest on it, there is no grace period on a credit card cash advance. Interest will begin incurring the moment you take out the cash and will continue to build until you pay it back in full.
On top of all this, there's often a flat fee associated with credit card cash advances – typically around 3% of the total amount you take out. That means if you take out a $1,000 cash advance, you'll be paying an additional $30 in fees, on top of the interest that immediately starts accruing.
Let's go further with that hypothetical $1,000 cash advance. Let's say the APR for cash advances on your card is 24%, and the flat fee is 3%. If it takes you a month to pay back your cash advance, you'll be paying a total of $1,050 when all is said and done. You're paying $50 for the privilege of having cash on hand, a high price to pay, no matter how convenient it is.
If you'd just made that $1,000 purchase on your credit card and paid it back within the grace period, that $50 would still be in your pocket, waiting to be put into savings, or spent on a nice dinner out.
How do I calculate the total cost of my cash advance?
Want to calculate how much a cash advance would cost you? Your first step is going to be pulling out your credit card contract, and locating the interest and fees your lender charges for a cash advance. Once you find that information, plug it into this equation:
Your monthly interest owed = ((the amount you're borrowing x (APR/100))/365) + the flat fee
In the case of the $1,000 cash advance with the 24% APR, it would look like this:
$1,000 x .24 = $240, or the total amount of interest you'd pay on this if it took you a year to pay it back.
240/365 = $0.65, or the total amount of interest you're paying on this cash advance every day you don't pay it back.
So, if you took a week to pay back this $1,000 cash advance, it would cost you $4.60 in interest ($0.65x7), and $30 for the flat fee. In total, you'd be paying $1,034.60 on that $1,000 cash advance.
Is there ever a good time to take out a credit card cash advance?
In short, no. If you need cash—like, actual paper cash—right now, there are typically a few other options you should explore before heading over to the nearest ATM with your credit card in tow.
Instead, consider using a digital payment app like Cash App, Venmo, or Paypal to send people money instead of paying them in cash. In this new modern world, even farmer's and flea market vendors very often take digital payments.
If you find yourself frequently needing paper bills, make sure to take out a portion of your paycheck in cash whenever you deposit it. That way you won't have to pay ATM or cash advance fees when you head out to your favorite cash-only tapas place.
Even writing a check and taking it to a check-cashing store is a better option than taking out a credit card cash advance. You'll still have to pay a fee to get your cash, but you won't be charged any interest.
If you find yourself in an emergency situation where a cash advance is your only option, just remember to do the math first. Calculate exactly how much this cash advance is going to cost you, and budget out ways to pay it back as quickly as possible.
In general, you deserve better than a costly cash advance.