Most credit cards give you the option of taking a cash advance. This means that you can withdraw money from a credit card simply by using it at an ATM. Many companies even promote advances. They send you blank checks with your paper billing statements. You can simply deposit them into your checking account and use the money immediately.
However, as simple and convenient as it sounds, there are a few things you need to keep in mind about cash advances.
I remembered these things recently, actually. A friend took a small cash advance on his credit card and had to deal with numerous charges he was unaware of. That’s why it’s important to pay attention to the fine print and consider the following four facts about cash advances. They could save you a lot of wasted money!
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4 things to remember when taking out a cash advance
1. Higher APR
The cash advance APR for a credit card is usually much higher than its regular purchase APR. This means that you will spend a parcel more to use that money.
For example, my favorite daily spend card is at 14.49%, based on my personal credit score. However, if I were to use this card to get a cash advance, the APR on that money would increase dramatically. That would be 26.24%! If I carried that balance (instead of paying it off right away), that interest could really add up quickly.
Oh, and as you’ll see in #4 below, this interest rate is equal Continued of a whopper due to a special cash advance caveat.
2. Cash advance fees
Most credit cards will charge you a fee when you take a cash advance, which is standard. For example, the Chase Sapphire Preferred Card charges a transaction fee of 5% or $10, whichever is greater, when you take a cash advance. If you withdraw $100 in cash advance with this card, you will net $90 after taking into account the cash advance fee. Take a $1,000 advance and you’re talking $50 fees.
The card issuer will charge the fee in advance or when your balance is due, depending on the credit card’s terms. You can avoid paying high interest on a cash advance by paying off the balance. But you will still have to pay these fees.
Between that and the interest rate, your fees add up fast, huh?
3. Payment can be applied to low APR balance first
If you only pay your minimum balance due each month, your credit card company will generally apply the payment first to your lowest APR balance. They will only apply payment to higher APR balances once you pay off your lower APR balances. So when you take a cash advance on a card that already has a lower APR balance, it may take you even longer to pay off your high APR balance.
Let’s look at this with an example. Say you have a credit card with an APR of 15.24% on regular purchases and 20.24% on cash advances. You make a purchase worth $100 and then receive a cash advance of $100.
When your statement is due, you send the required minimum payment of, say, $50. (Perhaps you’re even assuming that $25 will go towards the purchase balance and $25 towards the cash advance.) Well, some credit cards will take that money and apply it to low balances first. APR. This means that they will use the money to clear half of the balance created with regular purchases (which only incurs 15.24% interest anyway) before applying it elsewhere.
You will still have the full $100 of your cash advance outstanding. And, remember, the issuer charges a higher rate of 20.24% on this. You may have saved some money on the APR purchase. But the credit card company will come out on top by earning even more on the entire cash advance.
To avoid this situation, you should try to get a cash advance on a credit card that has little or no other balance (if you need to get a cash advance at all). You must also pay more than the minimum payment due. While credit card companies are legally still able to apply the minimum payment to the lower interest rate debt first, any excess payment (above the minimum) must be applied to the higher interest rate balance.
So every penny you pay above that minimum owed will go directly towards your most expensive debt.
4. Cash advances have no grace period
This is where even the most credit card savvy could get tripped up and pay more than expected. It may come as a surprise, but credit card companies don’t usually give a grace period for cash advances. This means that interest starts accumulating the second you take the cash advance.
Most responsible credit card users are used to making purchases with their credit card and then paying the bill in full when their account statement arrives. If you do this, you essentially get a “grace period”. You won’t be charged a single penny of interest during those few weeks between when you make the purchase and when you pay off the full balance.
However, this practice does not work if you take a cash advance. Interest begins to accrue from the moment the ATM spits out your money. And it keeps piling up every day you don’t pay it back. By the time your statement arrives, the cash advance has already accrued interest. And there is no way around it.
The key here is not to wait for the balance to be due. Repay everything you can, as soon as you can.
Who should get a credit card cash advance?
Credit card cash advances are convenient, but they are very expensive. Most charge an upfront fee and you must pay interest on the cash advance immediately. There is no grace period between when you take the cash advance and when the statement closes like there is with standard purchases.
There are very few situations where someone should take a cash advance. This should be a last resort. The only scenario someone should consider getting a credit card cash advance is if they absolutely must pay cash for a purchase right away and don’t have enough cash available. For example, your car is broken down and you need to use a taxi to get to work, and the taxi only accepts cash payments.
These scenarios are incredibly rare, so most people should be able to avoid receiving a credit card cash advance. If you need to get a cash advance, be sure to pay off the balance as soon as possible, ideally the same day, to reduce any interest charges you may face.
If you need to borrow money, you can look to other options before getting a cash advance.
If you need to borrow a small or medium amount of money, you can apply for a personal loan from a bank or online lender.
Personal loans are very flexible loans that you can use for almost any reason. You can apply for secured and unsecured loans. Secured loans are easier to get and have lower rates, but you must have some form of collateral to offer the lender. Unsecured loans tend to have higher rates and stricter requirements, but don’t need collateral.
These loans can often allow you to borrow between $1,000 and $25,000 or more, although the exact amount varies from lender to lender. They are also suitable if you need cash quickly, as many personal lenders can make a loan decision and fund a loan within business days.
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Related: What is a good interest rate for a loan?
Empower is an app that helps you track your spending and other financial habits. The app also helps you build your savings with an automatic savings feature.
Other benefits of linking your checking account include getting smart recommendations to help you save money and alerts for bill due dates or when subscription costs rise.
Empower also offers cash advances that you can use if you are in dire financial straits. If you have the Empower card, you can get an advance of up to $250^ if you meet certain conditions, such as setting up direct deposit.
Even if you don’t have the Empower card, you can still get an advance of up to $50, as long as you meet other eligibility criteria. Empower automatically deducts the refund from your next paycheck after it is deposited. There is no interest or late fees. There is an $8 monthly fee for using the full suite of other Empowers services.
Empower is a fintech company, not a bank. Banking services provided by bncc bank, member FDIC.
^ Eligibility requirements apply.
Read more: Allow Review
Borrow from friends and family
If you only need to borrow a small amount of money, the easiest way to get the money you need might be to borrow money from family and friends.
Mixing relationships and money is always a dangerous prospect, so make sure you can quickly repay family and friends when asking them to borrow money. It can help both of you feel more comfortable if you write down the terms of your agreement, such as how much you’ll borrow, how much you’ll repay, and when you’ll repay it. A written record can help avoid conflicts down the road.
Sell old and unwanted items
Everyone has old unwanted items lying around their house. If you need to raise funds, host a garage sale or try selling your stuff on an online marketplace like eBay, Craigslist, Facebook Marketplace, or OfferUp.
It’s a good option because it keeps you out of debt and helps you declutter your home by doing two things at the same time.
The best option is to avoid cash advances altogether. There are other options if you’re stuck. For example, you can try a personal loan. Many personal loan platforms can get you the money within a day or two.
Of course, sometimes, despite our best intentions, things get a little tight and we’re forced to do things we don’t like. If this means you need to take a cash advance, at least do your best to pay it back as soon as possible.
The next time you take out a cash advance, keep these tips in mind. This way, you can minimize the fees you pay on these advances.
Read more: Best Cash Advance Apps