Understanding What Is a Cash Advance on a Credit Card (2023)

What Is a Cash Advance?

A cash advance is a feature offered by credit card companies that allow cardholders to withdraw cash from an ATM or bank branch using their credit card. Cash advances are typically capped at a percentage of your card's credit limit.

Once you take out a cash advance, borrowing a loan from your credit card provider is considered borrowing, and the amount needs to be repaid. The cash-out amount cannot exceed the current balance available on your credit card; in most cases, you only receive a portion of the available balance. Unlike regular credit card purchases, the cash-out or transfer amount will add to your balance, and interest will begin accruing immediately.

How Does a Cash Advance Work?

You can get cash advances from an ATM, in person, or a convenience check. Moreover, some credit card companies may allow you to request a cash advance through other channels, such as online or over the phone.

A physical credit card and a valid ID like a driver's license may be required to initiate a cash advance. You'll also need to enter a personal identification number (PIN) if you use an ATM. The credit card company will then process your request and transfer the cash to your account.

The cash advance amount and all associated fees will appear on your credit card statement. Interest will begin accruing from the moment you transfer or withdraw the money. Additionally, most credit card companies will only allow you to take your entire credit line as a cash advance.

Many banks keep the exact amount private, but numerous cash advances typically offer only a few hundred dollars, which is suitable for common emergencies but may not be an ideal choice when needing a significant amount of cash.

Cash Advance Terms and Fees

Cash Advance Fees:

Cash advance fees are charges credit card companies impose when a cardholder takes out a cash advance. This fee is usually a percentage of the amount withdrawn and independent of interest charges. For example, a $600 cash advance with a 5% fee will cost you $30 in fees.

Cash advance fees can vary depending on the credit card company and the specific terms of the card.

The fees vary and depend on the credit card providers. Some companies charge a flat rate for each cash advance, while others charge a percentage of the amount withdrawn. Cash advance fees are generally higher than those associated with regular credit card purchases.

Cash Advance APR/Interest:

Cash advance APR (Annual Percentage Rate) or interest rate is the interest rate that a credit card company charges on cash advances. Cash advance APRs are higher than the interest rates for regular credit card purchases or balance transfers, which can be as high as 36%, with a current average of 21.2%.

Like cash advance fees, the cash advance APR can vary depending on the credit card company and the specific terms of the card. The way you take a cash advance and the type you choose also matter. Some banks or credit card providers have varying rates and terms for ATM withdrawals compared to in-person offers on a branch.

Other Fees: ATM or Bank Fees:

If you use an ATM or visit a bank to withdraw a cash advance, you can expect to pay a fee for the transaction.

The ATM operator charges ATM fees, usually a fixed amount per transaction. Different ATM operators and different ATM locations can affect this fee. Additional ATM fees may also apply if you are withdrawing cash abroad.

Banks or financial companies may charge additional fees when you withdraw cash using credit cards. These fees can also vary depending on the institution and the location of the bank branch.

Please be aware that ATM and bank fees are separate from any cash advance and interest charges charged by your credit card company. These fees increase the cost of borrowing. These fees can add up quickly, making cash advances an expensive option for accessing cash.

Grace Period and No Grace Period:

A grace period is the period of time during which you can pay off your credit card balance without incurring any interest charges. Grace periods typically apply to regular credit card purchases, but they do not apply to cash advances.

Apparently, there is no grace period for cash advances because interest begins accruing from the first day you withdraw the cash. The accumulated interest is calculated daily at an agreed-upon rate (significantly high!) until the balance is paid off in full.

Therefore, paying off the balance immediately is vital to avoid accruing high-interest charges.

Separate Credit Limit:

Cash advances often have a separate credit limit that's a portion of your overall credit limit and different from your regular credit limit.

The separate credit limit is a portion of your credit card's total credit limit that can be withdrawn as cash, not all of the credit limit. You use the latter for regular purchases, usually higher than your cash advance limit. You can only take out a few hundred dollars at a time. For example, if your credit limit is $5,000, your cash advance limit maybe $1,000.

It's important to note that the cash advance limit is not a separate pool of funds but a portion of the overall credit limit reserved for cash advances. Once you reach the cash advance limit, you cannot withdraw any additional cash until your pay down the balance.

How to Get a Cash Advance From a Credit Card

If you need to get a cash advance from your credit card, there are a few different ways. Here are three options:

Cash Advances via an ATM

To get a cash advance from an ATM, you'll need your physical credit card and a personal identification number (PIN) provided by your card issuer. Similar to withdrawing money from your checking account or using a debit card, there are daily ATM cash withdrawal limits and potential ATM fees.

Cash Advances via Convenience Check

Your credit card issuer may provide you with convenience checks linked to your card account. These checks work like regular checks, allowing you to make payments to a specific person or organization, and these check payments appear as charges on your credit card statement.

In-Person Cash Advances

You can also require a cash advance in person at a branch of your credit card provider but don't forget to bring your credit card and ID (DL or Passport) to complete the transaction.

Pros and Cons of a Credit Card Cash Advance

A credit card cash advance can provide quick access to cash when needed, but there are pros and cons to consider before deciding to take one out.

What Is the Maximum Cash Advance Limit You Can Withdraw From a Credit Card?

The maximum cash advance limit you can withdraw from a credit card is typically capped at a percentage of your card's credit limit.

For instance, if you have a credit limit of $9,000, and the card caps your cash advance limit at 30%, your maximum cash advance will be $2,700. It's important to note that this percentage can vary depending on your credit card issuer and other factors.

When Should You Pay off a Cash Advance?

The answer is: Try your best to pay it off as soon as possible to avoid crazy interest charges.

As we discussed before, the interest charges will start accruing from the day you take out the cash advance, and they will continue to accrue until the balance is paid off in full.

You should try to pay off the entire balance of the cash advance as soon as possible. If you cannot pay off the balance, aim to pay as much as you can afford each month and try to pay more than the minimum payment required. This will help you reduce the balance more quickly, as the additional payment goes towards the principal, lowering the overall amount and decreasing the interest charges.

Once you find yourself in a situation where you are struggling to pay off a cash advance, consider a lower-interest loan or a more cost-effective option, such as a personal loan or line of credit.

Does a Cash Advance Hurt Your Credit?

In general, a cash advance won't seriously damage your credit score but will still impact your credit.

If you add to your credit card debt and increase your credit utilization, your credit scores could be negatively impacted. Maintaining your credit utilization rate below 30% of your total available credit can be a very healthy and effective strategy, with some suggesting an even lower rate of 25%. If you need help to make timely payments, your credit could also take a hit.

On the other hand, if you make timely repayments and keep an appropriate credit utilization ratio, a cash advance shouldn't hurt your credit score.

However, you should know that its higher interest rates and fees can make it harder to pay off your debt and increase the risk of missing future payments. A cash advance can be an excellent option for a one-time emergency cash fund as long as you can pay it off quickly since there are minimal interest costs, and it won't affect your credit score. However, late payments or defaulting can undoubtedly damage your credit score.

How to Avoid Taking a Cash Advance

Make purchases with your credit card

Try to avoid cash purchases via cash advance. Instead, make a purchase or payment using your credit card, which can prevent high-interest costs and transaction fees.

Build an Emergency Fund

Setting up an emergency fund to cover unforeseen expenses and avoid using credit card cash advances is a good idea.

Monitor Your Balance

Almost all banks currently provide online banking or an app to track your account details. It is a convenient way to monitor your balance and get notifications in either email or text messages.

Avoid Unnecessary Purchases

Ask yourself if the purchase you intend to make with your cash advance is worth the extra fees or if it can wait.

How to Lower Cash Advance Fees

To lower cash advance fees, you can use a few strategies.

First, determine how your bank or credit card provider charges transaction fees for cash advances, either by a percentage of the amount or a flat rate for each transaction. It is wise to take the minimum amount you need when fees are based on a percentage, whereas for a flat rate, it is more cost-effective to withdraw all the cash you need at once.

Additionally, pay off your cash advance immediately because interest begins accruing immediately.

Finally, consider a credit card with better terms, such as lower cash advance fees and a more competitive interest rate, to save money in the long term.

Alternatives to a Cash Advance on a Credit Card

A Personal Loans

Personal loans could be a better option for those who need more money. The loan amount, interest rate, and repayment term can vary depending on your credit score and other factors.

Pros: Personal loans generally have a fixed interest rate, fixed term, and fixed payments. You may not need collateral to be approved.

Cons: If you have poor credit, the annual percentage rate on a personal loan could be the same or even higher than the APR on a cash advance.

Friends and Family

Borrowing money from a friend or family member can be less costly and more flexible than other loan options.

Pros: Informal loans from family or friends can come with lower interest rates than a bank would charge.

Cons: A broken loan agreement can cause tension with the person who loans you the money.

Payday Alternative Loans (PALs):

A Payday Alternative Loan, or PAL, is a short-term, small loan some credit unions offer. PALs usually have more flexible repayment terms and favorable interest rates than traditional payday loans. With PALs, you don't have to pay it back in full by the next payday, but can pay it over several months. However, many PALs programs are exclusively available to credit union members.

Pros: PALs typically have lower fees and annual percentage rates than traditional payday loans.

Cons: You must be a credit union member for at least a month if you apply for a traditional payday alternative loan.

'Get-Paid-Early' Apps

These cash advances apps, such as Earnin, Chime, and others, lend you money based on your paycheck. The borrowing amount will be a portion of your paycheck and must be repaid before payday to avoid additional fees.

Pros: strong>Many of these apps don't charge interest.

Cons: strong>They can include fees such as monthly memberships.

Request a Paycheck Advance

It is always worthwhile to ask your employer for a paycheck advance to cover an emergency expense. Doing it has no harm, and it usually doesn't have interest costs or processing fees.

Pros: strong>Employers are unlikely to assess fees or charges for a payroll advance.

Cons: strong>Your employer may not allow employees to take advances.