Cash Advances on Credit Cards

What does Cash Advances on Credit Card mean

Cash advances on credit cards are an inbuilt feature in your credit card, where you are able to access hard cash from your credit card line of credit.

Technically, you take money from your credit card account in form of cash to your pocket as opposed to making a purchase at a merchant’s shop.

How does Cash Advance on Credit Cards work

This happens when you take a Cash Advance on your Credit Card

Normal purchases via credit card involve you swiping your card and making payments later (after the billing period), but with a cash advance, you are allowed to easily access cash via an ATM just the same way you access cash via a debit card, the difference being, you are accessing your credit card balance as opposed to your drawing account (accessing your own funds).

Make no mistake, as much as it’s similar to drawing money from your debit card, the cost implication is not the same! This is a short-term loan against your credit card line of credit.

The credit card is essentially lending you money and it comes at a cost (transaction fee). Unlike normal purchases with a credit card, cash advances come with a higher APR and interest is chargeable immediately (no grace period).

Cash advances on credit cards can be in the form of;

• Mailed checks (convenience checks) sent by issuers. If you cash the check, then it’s counted as a cash advance.
• You can also visit your bank in person and request a cash advance against your credit card.
• Special types of purchases like funding your PayPal, purchase of lottery tickets, gambling, etc. may be classified as cash advances.

A credit card cash advance is usually pegged to a percentage of your credit limit.

Is it wise to get a Cash Advance with a Credit Card

Things to consider before taking Credit Card Cash Advance

High APR on Cash Advances on Credit Cards

While it seems quick and convenient, it’s a very expensive mode of accessing short-term loans. The average APR for credit card cash advances for major banks is between 17%-19% compared to 13%-16% on normal credit card purchases. This is way steeper than purchases on the same card or taking personal loans.

Processing fees (3%-5%, or minimum of $10) on Cash Advances on Credit Cards

They are very expensive to process. The fee is a percentage of amounts withdrawn, the minimum being capped at $10, and is chargeable even on small cash advances. For example, a $400 advance will cost you $20 if 5% processing fees are applied. Expect to get another charge when withdrawing from the ATM machine (around 2$-$5). The ATM operator and the issuer may both charge this fee…….The costs do add up rather quickly.

There is no grace period on Cash Advances on Credit Cards

Interest on credit card advances starts accruing immediately. This is in contrast to normal purchases which enjoy a grace period of around 21 days after the billing date. For credit card cash advance you will pay interest (at least for a handful of days) even if you clear the credit card advance at the end of the billing cycle.

Are Cash Advances on Credit Cards bad for Credit Score

This doesn’t affect your credit score directly, but remember, as much as it doesn’t show as a line item on your credit history, it does have a direct effect on your credit utilization score. Cash advances have negative financial consequences and huge advances are more likely to push your credit utilization ratio above 30%. Now this, affects your credit score directly.

Credit Card limit

A cash advance is usually capped as a limit on a credit card limit. If your credit limit is $900, and your cash advance limit is capped at 30%, then you are entitled to $270. Consider increasing your limit if the target is $270 as this already weighs down on your credit utilization ratio.

Payment allocation rules

Federal laws (§ 1026.53 Allocation of payments) require that card issuers prioritize minimum payments to balances with the highest interest rates. Any payment above the minimum balance can be used to offset any other balance as per the issuer’s policy. Technically, the issuer can use any payments above the minimum balance to offset balances with the lowest interest rate meaning that your expensive balances(cash advances) will continue compounding faster and take longer to pay off.

Alternatives to Cash Advance

Turn your available credit into an installment loan

Ask your bank about the feasibility of turning your current balances into an installment loan. This arrangement might cost you, but not as much as having a cash advance loan running out of hand.

Borrow from a family member

Borrowing from your family or close circle of friends can be a great source of emergency funds. As uncomfortable as it might be, it might make a difference between sinking deeper into debts and giving yourself a fighting chance.

Request an extension

Rather than opting for a credit card cash advance to clear an emergency bill or a pressing debt, it’s advisable to request creditors for an extension or a flexible plan for payment of debts.

Overdraw your checking account

It’s a better option compared to a credit card cash advance. It attracts a fee, but you won’t face credit interest rates. Please keep in mind, overdrawing too much and for too long on your checking account has its negatives as well as you might be reported to a debit bureau.

Consider debt consolidation

You are better off applying for a personal loan with favorable terms which consolidates your current credit balance balances hence freeing some cash to avoid cash advances.

Is it bad to withdraw money from a Credit Card

 Yes! Do it only after careful consideration of the circumstances at hand and the urgency of funds (extreme emergencies). Ordinarily, I wouldn’t advise on credit card cash advances unless (or in a similar situation-life and death situation!);

• When Predatory loans

  When its the only next available option. In this case, all else has failed.

• When you are facing eviction

  Getting evicted sucks. You are better off getting a cash advance to pay off rent with expensive money than spending your night in the cold.

• When about to default on another card

  This is just a quick fix as you ponder over a more sustainable solution to your fast accumulating debts.

• Car Breakdown

  When you are stuck nowhere and the only way to clear off towing fees involves getting a cash advance, in this case, they clearly don’t accept card payments.

How do you Stop Cash Advance on Credit Card

• Some issuers may allow you to disable the feature. This is key when you can’t manage your temptations.
• Borrow as little as possible
• Pay off your cash advance as fast as you can

Bottom line

As much as it may seem like the next available option, think twice about the decision. Do some research on how to get cash from your credit card without taking an actual advance (be creative with gift cards etc….). A clear understanding of how a cash advance works helps to avoid the obvious pitfalls.

Huge cash advances can easily drive you into debt as the cash you are accessing, more likely than not, advances are usually higher than the payments being made. This compounded with high APR is a sure way to land into unmanageable debts (perennial cash flow problems).