Why You Should Avoid a Credit Card Cash Advance

How Cash Advances Cost More and Lead to Debt

Man taking money out of ATM
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The option to get cash from your credit card may sound tempting, especially if you're low on cash, but a cash advance is nothing like withdrawing cash using your debit card. Credit card cash advances are expensive and can easily lead to ​credit card debt

Using your credit card to withdraw cash from an ATM, using one of the card issuer-supplied convenience checks, or using your credit card as overdraft protection are all ways your credit card issuer makes cash advance available.

It might be easy to take out cash advance your credit limit, but you should avoid the option unless it's an extreme emergency.

Why Credit Card Cash Advances Are So Expensive

Cash advances are one of the most expensive types of credit card transactions. That's because they're priced differently than other purchases and even balance transfers.

Cash advance fees

Cash advances are charged a cash advance fee that’s either a minimum flat rate or a percentage of the amount of the cash advance. For example, the credit card terms may state the cash advance fee is $5 or 5%, whichever is greater. Under these terms the fee on a $75 cash advance would be $5, since 5% of $75 is $3.75. The fee on a $150 cash advance would be $7.50, which is 5% of the advance amount.

Cash advance fees typically range from 2% to 5% of the cash advance amount, with more credit cards charging on the higher end.

ATM fees

In addition to the cash advance fee, you'll also be charged an ATM fee, between $2 and $5, depending on which bank’s ATM you use.

The ATM operator and your credit card issuer may both charge an ATM fee.

Higher interest

Cash advances almost always have a higher interest rate than the rate for purchases and even balance transfers. Assuming you paid each balance within the same amount of time, you would pay more interest on a $500 cash advance than on a $500 plane ticket, for example.

The longer it takes you to pay off a cash advance, the more interest you’ll pay.

No grace period

Most credit card don't offer a grace period on cash advances. That means you don't get a full billing cycle to pay in full and avoid a finance charge. Interest starts accruing from the date the transaction clears your credit card account. Don't wait until your bill comes to pay off the balance if you want to minimize the interest you pay on your balance. If that's the only balance on your credit card, pay it off as soon as possible.

Payment allocation rules

Federal law requires credit card issuers to apply the minimum payment to balances with the highest interest rate. But, anything above the minimum, credit card issuers can apply at their own discretion. Often, payments above the minimum are applied to the lowest interest rate balance which makes it take longer to pay off a cash advance balance. And paying longer means you'll pay more interest in the long run.

You Could Have a Bigger Cash Flow Problem

That you need to take out a cash advance could be a sign of a bigger financial problem. Ideally, you should have enough income to meet all your financial obligations. Consider this: if you don’t have enough money to pay your bills and other expenses, how will you have enough money to pay your credit card bill when it comes?

People who take out cash advances are more likely to default on their credit card than people who do not. That’s part of the reason that interest rates on cash advances are higher. It also means you’re at risk of falling behind on your credit card payments if you have to take out a cash advance.

If you find that you’re frequently using cash advances to pay for things, especially things like groceries and utility bills, it’s time to take a closer look at your budget and spending.