How Does a Credit Card Cash Advance Work? The Definitive Guide

What Is a Credit Card Cash Advance and How Does It Work, August 2021

We use credit cards for everything– from paying bills to shopping. They offer a convenient way to help you stay afloat when you are short on cash.

However, as convenient as they may be, there are some situations where you cannot use your credit card as a means of payment. These situations may include paying for a broken vehicle or an emergency medical bill where they do not accept credit cards- only cash.

When faced with such situations, taking out a credit card cash advance is a great option. But first things first, you need to understand what a cash advance is, how it works, its limitations, and other crucial things. In this article, we explore everything you need to know about cash advances.

How Does A Credit Card Cash Advance Work?

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A credit card cash advance in simple terms is using your credit card to get cash. It’s a loan on your credit limit that you can use to spend as you wish.

For example, instead of paying for an item with your credit card and later paying back your credit card, you’re simply borrowing cash from your credit card and pay it back later.

A cash advance is pretty much like using a credit card since it’s also a short-term loan- the only difference is the fact that you’re taking the loan in the form of cash.

Like some short-term loans, a cash advance involves cash being loaned to you so that you will pay it back, probably quickly and with a fee or interest, or both.

How To Go About Getting A Credit Card Cash Advance?

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When you receive a credit card, a Personal Identification Number will also be sent to you in a separate mailing. With this PIN, you will be able to obtain a cash advance pretty quickly. You can obtain the cash in various ways;

One, head over to the ATM, enter the PIN (or any other identification your credit card company has provided), and then withdraw the cash. It’s as simple as that. Very convenient.

Two, you can visit your bank and apply for a cash advance.

You can easily get a cash advance for emergencies as long as your credit score is good and if you haven’t maxed out on your credit card limit.

Don’t Miss: How to Get a Capital One Cash Advance?

Why Cash Advances Are So Expensive?

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While cash advances are convenient and reliable, they have a huge drawback, which is that they are too expensive.

Like with other loans, you’re borrowing money and paying a hefty amount to do so.

Plus they are also offered for a limited time, unlike with installment loans.

There are various reasons why cash advances are so expensive:

High fees: Like the most same day or payday loans, cash advances come with hefty fees. Some credit companies charge a cash advance fee ranging from 2%-5% of the total amount you’re borrowing. There are also those that charge a fixed amount, say $10. For example, if you take out a $500 cash advance, you will pay $10 if the fee is 2% and $25 if the fee is 5%. Of course, the fees are much higher compared to traditional loans.
High-interest rates: Like payday and same day loans, you will be charged exorbitant interest rates when taking out a cash advance. In fact, according to CreditCards.com research, the average credit card cash advance annual percentage rate is estimated to be 23.68%. What’s even more shocking is that using your credit card to shop or purchase other products or services is cheaper compared to taking out a loan using the same credit card. So this is something you need to know about before taking out a cash advance
No grace periods: Cash advances are also indirectly expensive because they have no grace periods. When making purchases with your credit card, you will have around one month or more to repay interest-free. It’s different from a cash advance. Interest will start to accrue the same day you take out the advance. You should, therefore, pay off the advance as soon as possible to reduce the interest you pay on your balance.

Don’t Miss: How to Get a Chase Cash Advance?

Dangers Of Cash Advances

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While a credit card advance can help you fix an emergency fast, it comes with a hefty price, and this makes it very dangerous compared to long-term loans.

Relying on cash advances can lead to huge financial trouble.

Some of the dangers of cash advances that you should look out for include:

Substitute for saving- Because you get emergency cash anytime, you might feel there is no need to set money aside for emergencies.
Overly convenient- Cash advance can be a debt-trap because credit companies make it extremely easy for you to get cash.
Cash advances have shorter repayment periods compared to installment loans.
High fees and interest rates are very high.
Cash advances don’t have a grace period.

Don’t Miss: How to Get a Wells Fargo Cash Advance?

What Are Alternatives To Cash Advances?

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Check out some of the best and most reliable alternatives to cash advances that will help save your money.

Use your credit card to make purchases as the fees and interest rates will be much lower.
Get a personal loan from your bank or credit union.
Speak with your creditor about working out an extension.

Request for a loan from your family, close friends, or colleagues.
Get a side hustle that will earn you some extra cash.
Request a salary advance from your employer.
Selling off assets you no longer need.

So, should you take out a credit card cash advance? That’s all up to you, but ideally, you want to go with the alternatives to cash advances. That being said, Cash advances should be used only in an extreme emergency.