When you need money fast, your first thought might be to take a cash advance from your credit card. It's quick and easy, and your card issuer may seem to be begging you to borrow by sending you offers and blank checks. Still, cash advances can be expensive, so before going this route, be sure you consider alternatives such as a loan from friends or family, a 401(k) loan, a Roth IRA withdrawal, a personal loan from a bank or other lender, a secured loan, a salary advance, a peer-to-peer loan, or a payday loan.
Key Takeaways
- A credit card cash advance is a loan from your credit card issuer.
- Cash advances generally have no interest-free grace period, carry higher interest rates than regular purchases, and may impose transaction fees.
- The amount of the advance is usually limited to a percentage of your available credit limit.
- Depending on your situation, you may have several other options for obtaining cash that will be cheaper.
How a Credit Card Cash Advance Works
A credit card cash advance is a loan from your credit card issuer. As with your everyday purchases, the cash advance will appear as a transaction on your monthly card statement.
Significantly, though, the terms for cash advances are different from those of purchases—and not in your favor. There usually is no grace period for cash advances; interest starts accumulating from the date of the transaction. Also, the interest rate usually is higher for cash advances than for purchases.
Credit Card Cash Advance Terms
Details about cash advance fees and terms can be found in the Schumer box on your card statement as well as in the original credit card agreement. Below is an example from the Chase Sapphire Preferred card.It shows that the annual percentage rate (APR) for a cash advance is 19.24%, compared to 15.99% for purchases. The fee is either $10 or 5% of the advance, whichever is greater.
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Another important detail: When a credit card carries different types of balances, payments are applied in a manner chosen by the credit card issuer, not necessarily to the balance the cardholder wants to pay off first. So the issuer can apply your payments to low-interest balances before high-interest ones.
These terms mean that even if you make payments regularly and diligently, it can be hard to pay off the advance, especially if you're continuing to use the card to make purchases. Getting sucked into an ever-increasing debt spiral is very easy.
Cash advances usually are limited to a percentage of the cardholder's credit limit. Each credit card issuer has its own formula for setting cash advance limits. In this example, the cash limit is 20% of the credit limit:
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Alternatives to a Credit Card Cash Advance
Because of the potentially high costs of a cash advance, it's worth investigating other options. Depending on your creditworthiness and the assets you have access to, here are eight alternatives that might be available to you.
1. Loan From Friends or Family
Consider asking folks close to you for a free or low-interest short-term loan. Yes, asking can be embarrassing, and the loan could come with a lot of emotional strings. It will help if you keep things businesslike: Use a properly executed written agreement that spells out all of the terms, so both sides know exactly what to expect concerning cost and repayment.
2. 401(k) Loan
Many 401(k) plans allow participants to borrow funds from their personal accounts. Interest rates and fees vary from plan to plan but generally are competitive with the rates on loans from a bank. The maximum loan limit is 50% of your vested account balance, up to $50,000, and repayment generally must be completed in five years or less. There is no credit check, and payments can be set up as automatic deductions from your paychecks. Keep in mind that while you're borrowing funds from your 401(k), they are not earning any investment returns, which could affect how much money you'll have available to you at retirement.
Also note that if you leave your job, your plan may require you to pay back the money you borrowed right away.
3. Roth IRA Withdrawal
You also can tap your Roth IRA for emergency funds, although that's usually not recommended because the money is supposed to be earmarked for retirement. Contributions to a Roth IRA are made with after-tax dollars (income you've already paid taxes on), and the Internal Revenue Service (IRS) rules allow you to withdraw that money at any time without penalty and without paying additional taxes on it.
If you're younger than 59½, be sure not to withdraw more than you've contributed. If you do, the earnings on your contributions will be subject to taxes and penalties, although there are some exceptions to the penalties.
4. Personal Loan From a Bank or Other Lender
For a borrower with good or excellent credit, an unsecured personal loan from a bank, credit union, or other lender may be cheaper than a credit card cash advance. In addition, personal loans generally have fixed interest rates, making them more predictable than credit card rates, which usually are variable.
5. Secured Loan
Loans that are secured by some form of collateral often have less-stringent credit requirements than unsecured loans and typically charge lower interest rates. Home equity loans and lines of credit are secured by your residence's value, for example. Some banks also make loans against the value of a certificate of deposit (CD).
6. Salary Advance
Some employers offer payroll advances, which can be repaid through automatic deductions from future paychecks. There is sometimes a small fee involved.
7. Peer-to-Peer Loan
P2P lending, as it has come to be known, is a system in which individuals borrow money from other individuals or investors. Credit requirements are less stringent, and interest rates can be higher or lower than loans from conventional financial institutions depending on your creditworthiness. These loans also may have additional fees.
8. Payday Loan
These short-term loans should be considered an absolute last resort due to their often-astronomical costs, with interest rates as high as 900% in some cases. Payday loans (and their close cousin, car title loans) can make credit card cash advances seem like the bargain of a lifetime.
Frequently Asked Questions
Does a Cash Advance From Your Credit Card Affect Your Credit Score?
Taking a cash advance from your credit card should have little or no impact on your credit score as long as you keep making your monthly payments on time. Where it might have some negative effect is by increasing your credit utilization ratio—the amount of debt you have outstanding as a percentage of all the credit you have available to you. However, a $500 cash advance would be no different from a $500 purchase in that respect.
What Is a Convenience Check?
A convenience check is a blank check supplied to you by your credit card company. You can use a convenience check for a number of purposes, including taking a cash advance. Whatever you use it for means you'll owe the credit company that much more money.
Can You Get a Credit Card Cash Advance at an ATM?
Yes, you generally can use your credit card at an ATM to get a cash advance. However, you will need a PIN number and there may be extra fees involved.
The Bottom Line
Depending on your exact needs and timetable, another sort of financing may be preferable to borrowing from your credit card. So before you take a cash advance, be sure to check out your other options. You also might want to build an emergency fund you can draw on in a future cash crunch.
