Do not get a cash advance.
In almost any situation you have better options. Negotiate a late fee with your landlord. Call your cell phone or cable provider to discuss delayed payment options. Keep a debit card in your wallet at all times.
But don't get a cash advance. Here's why.
What Is a Cash Advance?
A cash advance is a feature offered by most credit cards. It allows you to get cash at an ATM or bank like you would with a debit card. Instead of withdrawing the money from a bank account, though, this money comes from your credit card. A cash advance counts toward and is limited by your total credit limit.
Depending on how you have your account set up you can sometimes take the money directly out of an ATM. Otherwise, you'll probably have to go to a bank teller for the transaction. In all cases you are (essentially) buying the cash with your credit card.
Typically, you will take a cash advance directly in the form of hard currency, although sometimes, depending on why you need it, you might deposit this money into a checking account. People typically use a cash advance in one of two situations:
- They would like to make a purchase from someone who does not take cards, such as at a small store, an outdoor vendor or in many foreign countries.
- They need to pay a bill and can only do so in cash, such as to a landlord or contractor.
As a general rule your credit card will have a limit on how much you can take out in a cash advance. Most of the time that is a fraction of your overall credit limit or even just a few hundred dollars.
How Much Are Cash Advances?
Credit card companies charge you heavily for taking out a cash advance.
Credit card companies charge far higher interest rates on a cash advance than they do for regular purchases, and that interest typically begins to accumulate immediately. Where the average credit card purchase interest rate is 15.96%, the average interest on a cash advance is 23.68%.
What's more, a cash advance typically comes with up-front fees. These will include bank and ATM fees charged by the institution who hands over the money. Further, your credit card company will typically charge an advance fee as well. That fee might be a flat amount or a percent of the cash issued, depending on the card.
Finally, by law your credit card company must apply your minimum payment each month to the highest interest loan, so this much will go toward your cash advance. However, the law allows them to shift all payments above the minimum to other sections of debt. Any payment you make above the minimum will probably not be applied to your very high interest cash advance until you've paid off all the rest of your credit card debt.
Negatives of Getting a Cash Advance
Do not take out a cash advance if you have any alternatives. We really can't emphasize that enough.
- First, a cash advance is extremely expensive. Between interest and fees you will pay more for this money than you would by making a credit card purchase or taking out almost any other form of short-term loan.
- Second, there are very few circumstances where you will actually need a cash advance. Most businesses have moved to electronic payment. Very few will not accept direct payment from your credit card, and to get a cash advance you will need to have that much available credit on your account anyway. If you live in a rural community and the nearest store doesn't accept credit cards this may mean driving further, but the inconvenience will be worth the money you've saved.
- Third, you probably have better options, including: short term loans from a bank, peer-to-peer lending online or a salary advance. All of these products offer better terms than taking out a cash advance. You will probably even pay less by accepting an overdraft fee from your bank.
- Fourth, you can pay most bills late. This is not a great option, because utilities, rent and any other bill will all charge fees and may even report a late payment to your credit report. However, almost any bill will charge less for a late payment than your credit card company will charge for a cash advance.
When Should You Take a Cash Advance?
It is extremely rare that a cash advance is useful, increasingly because (as noted above) the world has moved past cash. Most people only actually require cash to pay their monthly rent or mortgage, and few credit cards offer a cap high enough to cover this kind of spending.
However, a cash advance is a wise alternative to a payday loan.
Payday loans are a nakedly predatory financial product which charge some of the highest interest rates on the market. Typically, they are the most expensive form of loan available to a consumer. If you truly need cash and cannot make your purchases directly on your credit card, a cash advance is preferable to taking a payday loan.
This is the lowest bar that a financial product can aspire to.