Question: What is a cash advance?
Answer: Most credit cards offer a way for you to get quick cash, which is referred to as a cash advance. Depending on the card, there are a variety of ways to get a cash advance. You can go to an ATM or a bank and use your credit card to withdraw cash. Or you can use a convenience check that you received in the mail.
The amount of cash you are allowed to withdraw depends on the terms your issuer gave you when you were approved for the card. Cash advance limits are usually less than the credit limit for your card. So before you even think about getting a cash advance, you need to know the terms and conditions for your credit card.
This sounds awfully convenient, doesn't it? That's one of the reasons that a cash advance is so tempting. It's so easy to take advantage of this when you need a loan. But you want to stop yourself from doing this. Here are a few reasons why getting a cash advance is a truly bad – and costly – idea.
There's a Transaction Fee
There might be a few cards that waive this fee, but most issuers charge it when you get a cash advance. So right off the bat, you're charged anywhere from 2 percent to 5 percent of the amount of your cash advance. So if you withdrew $500 and the fee is 5 percent, then you now owe the issuer a total of $525, not just the $500. But that doesn't include the interest you'll owe. That's just the amount you owe as soon as you get the cash.
The APR Is Usually High
When you read about the rates and fees for your credit card, you may not have even noticed that the APR for cash advances is usually different than the APR for purchases. And when I say "different," I don't mean different in a good way. The APR for a cash advance APR can run as high as 25 percent. So already you've paid a transaction fee and you're looking at a high rate. But your biggest problem is next.
There Isn't a Grace Period
This one really tops them all, in a way. The grace period is the number of days you have to pay off the purchase without paying interest. In general, grace periods last anywhere from 21 days to 25 days.
Some business credit cards only offer 20 days because these cards aren't covered by the Credit CARD Act of 2009. The CARD Act requires a grace period of at least 21 days. Now, that's if a grace period is offered; but note that card issuers, whether they offer business cards or consumer cards, aren't required to offer a grace period. But if they do, consumer cards must meet the requirements of the CARD Act.
So let's say that you got a cash advance of $500 and your cash advance APR is 24.99 percent. The amount starts accruing interest on $500 (plus the $25 fee) as soon as it's posted to your account. When you get the bill the next month, you already owe more than your original cash advance. There's no period of time where you can get this money interest-free, so now you can see why this is an expensive way to borrow money.
The Bottom Line About Cash Advances
Even if you're amazingly self-disciplined, a cash advance can mess up your finances. One of the main culprits is the lack of a grace period. So you can't possibly win in this situation. And what if you have an unpredictable expense in your life and you can't pay this off as quickly as you had planned? This situation can land you in debt because the compound interest starts piling up.
If you're desperate for cash, consider a personal loan instead. Or consider borrowing from a friend, family member, or even from a social lending website.
Life can get very messy, so as soon as you can, start building up an emergency fund. Rainy day funds can give you peace of mind as well as help cover those emergency cash flow situations.