For urgent needs, cash advances are definitely useful, but it comes with a price. To put it simply, cash advance allows you to get a short-term cash loan at an ATM or a bank using only your credit card. The main difference between cash advance and simple cash withdrawal is that you need to pay it back, much like everything else you buy using only your credit card. So basically you “buy” money at the expense of an interest fee and this is the main drawback of a cash advance.
Basic info about the cash advance
Almost every credit card in the US provides this feature. The borrower will normally obtain cash or a cash equivalent of up to 20 percent or 30 percent of the available credit limit on the card, basically a short-term loan.
Merchants can also regard the use of unique credit cards as a cash advance. Transactions handled as cash advances can, but are not limited to:
- When opening a bank account, initial deposits
- Protection against overdraft when a credit card secures a checking or savings account
- Foreign currency, money orders, or even traveler’s checks
- Virtual currencies (such as bitcoins) or gold
- Tickets for the lottery, casino chips, and even gambling wagers
- Gift cards from various stores and credit cards
As you certainly already guess, cash advance gives you access to unsecured funds. However, from the first day, the cash is extended, you can pay compounding interest on the advance plus an up-front service fee. In addition, most credit card companies only make available a part of your revolving credit line as a cash advance for use.
Terms of cash advance and fees
There is a higher cost of cash advances than normal transactions. A cash advance fee would be charged from you and, typically, a higher interest rate than you will pay for normal credit card transactions. It is possible to charge the cash advance fee as a percentage of the cash advance or a flat rate. For instance, a fee of 5% percent of the advance or $10, whichever is greater, can be paid by you. To confirm the exact fee, you’ll pay for cash advances, review your credit card terms.
To be honest, cash advances are a convenient way to quickly get cash, but they also come with high fees that overshadow any advantages. Always check the conditions before you take out a cash advance because you fall into the loan trap and your accumulated fees could reach dangerous highs.
Cash advance APR: Cash advances bear an interest rate that is separate, and sometimes higher than sales or balance transfers. For instance, the Bank of America®’s Cash Rewards Credit Card has a variable APR for sales and balance transfers of 13.99% to 23.99%, but a variable APR of 25.24% for cash advances.
Cash advance fee: A cash advance fee is also paid by your card issuer, and is usually 2% or 5% of the total amount of each cash advance you apply for. A $300 dollar loan or cash advance with a 5 percent charge, for example, would cost you $25. You can also expect a fee for taking out a cash advance whether you are using an ATM or visiting a bank.
No grace period: AS we already mentioned above, a grace period doesn’t benefit from cash advances. That means that starting from the date you withdraw a cash advance, you will be charged interest. That’s different from when you make a payment with your card because if the balance is paid in full by the due date, the lender gives a grace period of at least 21 days where you won’t pay interest.
Separate credit cap: There is always a separate credit limit on cash advances that is a part of your total credit limit. There could be just a few hundred dollars you can take out.
Note that a small percentage of your total credit line is typically your cash advance line and that interest payment starts to accrue immediately. Make sure you understand the fees and take all your options into account.
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