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What is a cash advance?

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Gaining quick access to cash during a financial crunch can be challenging, particularly if your checking account doesn’t have enough to handle an unexpected emergency. One option for obtaining cash promptly is to request a cash advance using your credit card. It’s important to note, though, that a cash advance isn’t the same as free money. Chances are, it will come with significant costs. Fortunately, there are alternative solutions that might help you save money.

What is a cash advance?

A cash advance is a brief loan taken out against a credit card’s available credit limit. Just as you repay regular credit card purchases, you must repay the amount borrowed through a cash advance. However, it’s crucial to note that the interest rate for a cash advance is typically considerably higher than the interest rate for standard credit card purchases. Moreover, most issuers charge a cash advance fee ranging from 3 to 5 percent of the total transaction amount.

How cash advances work

Initiating a cash advance can be accomplished through several methods. If your credit card is equipped with a personal identification number (PIN), you can use it to withdraw cash from an ATM, albeit subject to ATM fees. Alternatively, if your credit card issuer maintains physical branch offices, you can approach a teller to request a cash advance in person. Lastly, if your card issuer provides checks, you can write one to yourself and cash or deposit it as necessary.

It’s essential to be aware that, in addition to the elevated interest rates associated with cash advances, your card issuer immediately accrues interest on the cash advance amount.

Cash advance interest rates

The interest rate associated with a cash advance is typically markedly higher than your standard purchase APR, often approaching around 30 percent variable. Notably, there is no grace period for interest on cash advances, meaning that this elevated interest accumulates immediately. To determine the specific cash advance interest rate for your card, consult the terms and conditions and look for the Schumer Box, a concise table that provides essential information about your card. Within the Schumer Box, you can find details such as your card’s regular APR, penalty fees, late fees, and cash advance interest rate.

For instance, consider a credit card with an ongoing variable APR range of 11.99 percent to 22.99 percent, signifying relatively low-interest terms. However, when examining the fine print for rates and fees, you might discover that the APR for a cash advance ranges from 24.99 percent to 29.99 percent variable, which is significantly higher than the average credit card interest rate.

Cash advance credit line

Your cash advance credit limit represents the highest sum of cash you can obtain through your credit card and is calculated as a portion of your card’s overall credit limit, a figure determined by your specific credit card and its issuing bank. It’s essential to keep in mind that when you request a cash advance, you are essentially utilizing a segment of your credit card’s standard credit line. Consequently, these funds become unavailable for making regular purchases.

Should you do a cash advance?

Reserve taking a cash advance for genuine emergencies. While it’s a more favorable option than resorting to high-cost payday loans, exploring potentially more cost-effective alternatives is still advisable. Here are a few options to consider before turning to a cash advance:

  1. Utilize your emergency fund: If you’ve set aside some extra funds for emergencies, it’s preferable to tap into these savings before resorting to a cash advance.
  2. Borrow from friends or family: You can completely sidestep the burden of inflated interest rates by borrowing from friends or family if they can assist.
  3. Investigate local resources: Local community centers, non-profit organizations, or religious groups may offer support during financial crises.

While avoiding a cash advance may not always be feasible, if you must resort to one, try to borrow the minimum amount necessary and establish a plan to repay it promptly to reduce long-term costs.

The bottom line

Avoiding a cash advance is the recommended course of action whenever feasible. Nevertheless, this modest loan can serve as a plausible solution in a financial crisis. Before hastily resorting to a cash advance, consider accessing your emergency fund or seeking assistance from a friend or family member. Looking for alternative, more cost-effective options is advisable to save money in the long run. Thus, remaining informed about your choices is essential when contemplating a cash advance.

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