While cash advances are a viable option if you need cash, they can be a risky one, too. A cash advance means you use your credit card to withdraw cash from an ATM, which is then added to your credit card balance. This can turn out to be costly, and there are limits on how much you take out at one time.
Read on to learn more about what a credit card cash advance entails, the fees associated with them, and a list of alternative options.
What is a credit card cash advance?
The process of taking out a cash advance is very similar to going to the ATM and withdrawing cash from your checking or savings account. However, instead of taking the money from your bank account, you borrow it from the credit card company.
So, how do cash advances work? Simply put, it is a short-term loan that you are buying with your card.
Again, doing this will most likely cost you quite a bit in fees, and you can only withdraw a certain amount. The majority of credit lenders do not allow you to withdraw your entire line of credit and cap it off below your credit limit, usually at a few hundred dollars.
A cash advance is an option to keep in mind should an emergency arise, but many experts recommend that you do not do this unless absolutely necessary, rather than relying on it as a means for regular cash flow.
How does a cash advance work?
You can take out cash advances in one of three ways.
One: At an ATM. Using your PIN, or personal identification number, you can take out a cash advance at an ATM. You will only be able to withdraw a certain amount from the machine. This amount depends on the ATM and on your credit card.
Two: In person. You can request a cash advance on your credit card at your financial institution. You will be required to show identification.
Three: As a convenience check. This is when the credit card company sends the borrower a cash advance in the form of a check in the mail. You can deposit this check or exchange it for cash at the bank like a traditional one.
Why are cash advances so expensive?
Cash advance fees
This typically includes a transaction fee and a higher APR fee. Your credit card company determines fees. Handling fees are typically three to five percent, and APR fees can range from 14 percent to more than 25 percent.
Bank or ATM fees
The bank will charge you a fee for processing the transaction at their institution.
Overall, the interest rate is much higher on a cash advance than on using your credit card to make everyday purchases.
No grace period
From the moment you receive a cash advance, the money starts earning interest. With a traditional credit card, you have approximately 21 days between making purchases until this happens. But this is not the case with cash advances.
How to limit the fees of a cash advance
Tip 1: Understand your transaction fees. Transaction fee calculations depend on the total volume of the cash advance, or they adhere to a flat rate. If the former is the case, you can save yourself from having to pay a significant fee by limiting how much you withdraw. Regarding the latter, it's better to withdraw all the money you need in a single transaction instead of making multiple withdrawals.
Tip 2: Plan your repayment. Making efforts to pay off cash advances as quickly as possible is the best plan of action to pay the least amount of interest possible.
Tip 3: Build an emergency fund. Setting some funds aside in preparation for unforeseen circumstances is always wise. Having savings that you can dip into will keep you from going further into debt. It is best to establish a financial safety net when things are going well.
4 alternatives to cash advances.
Cash advances may be convenient, but there are alternatives, too. Here are four ways to access cash without resorting to a credit card cash advance.
One: Take out a personal loan. The interest rate and repayment schedule for a personal loan are significantly less than a cash advance. But it can still be costly if your credit score is poor.
Two: Borrow money from family or friends. This is undoubtedly more affordable than turning to the bank, and it's one of the simplest ways to borrow money without paying high interest rates and fees.
Three: Overdrawing from your checking account. Even though you will have to pay a penalty, you won’t have to make interest payments. You can do this at an ATM.
Four: Turning your line of credit into an installment loan. This method has become more popular in recent years. You do not need to fill out a loan application to do this. Additionally, repayment amounts are much more reasonable, as is any incurred interest.
The bottom line
While cash advances grant you access to cash quickly, it is best to use for emergencies only. No one wants to be weighed down with more fees and penalties than necessary, especially if you have other outstanding debts and ventures you're trying to save money for.
It's important to have tools at your disposal that not only help you build your wealth but reinforce healthy, everyday monetary habits so that you don't have to take out credit card cash advances.
One such tool to keep in mind is Point Card.
Designed as an alternative to traditional credit and debit cards, Point is an easy-to-use, transparent instrument that promotes financial independence. Cardholders can use their own money while receiving exclusive benefits, including unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shops. So, as a Point member, not only are you able to earn extra money by purchasing everyday items such as groceries and gas, but you are also saving money at the same time.
Also, Point cardholders are eligible for fraud protection with zero liability, rental car and phone insurance, and no interest fees. That means you won't have to worry about making any unnecessary repayments, ever.
Put simply, Point is a great tool for intelligently navigating your financial journey.
Made to spend.