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, 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 charged differently.

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.

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

No grace period

Most credit card terms specify that there is no grace period for cash advances. That means you don't get a chance to pay in full and avoid a finance charge. Interest starts accruing the first day you take the advance. Don't wait until your bill comes to pay off the balance. If that's the only balance on your credit card, clear it up as soon as possible.

Payment allocation rules

Federal law allows credit card issuers to apply the minimum payment to balances with the lowest interest rate. So, if you're only paying the minimum on a credit card with multiple balances at different interest rates, the cash advance balance won't decrease. You have to pay more than the minimum if you want to pay off your cash advance.

You Could Have a Bigger Cash Flow Problem

That you need to take out a cash advance could indicate a bigger financial problem. Ideally, you should have receive 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.