How does a credit card cash advance work?

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How to get a cash advance by credit card

Basically, a credit card cash advance is like taking a small loan from your credit card issuer – a small but very expensive loan (more on this below). You only withdraw money up to your card’s cash advance limit, which you can find on your credit card account page (or app) or in your cardholder agreement.

The limit on your credit card cash advance will usually be less than your credit limit, with a typical limit of between 20% and 50% of your total spending limit. For example, if you have a $ 5,000 credit limit on your card, your cash advance limit will likely be less than $ 2,500. Cardholders with higher credit scores tend to have higher spending and cash advance limits.

You can get a cash advance by credit card at a regular ATM, as long as you have your cash advance PIN. In most cases, you will need to proactively request your cash advance PIN from your issuer. Some issuers may provide your cash advance PIN through your online account, but you may need to call. The card issuer will likely send your cash advance PIN by mail if you request by mail or over the phone.

Before even considering a credit card cash advance, make sure your credit card issuer actually authorizes it. You can see if your card can be used for a cash advance by checking your cardholder agreement.

In addition to getting a credit card cash advance through an ATM, you can also use something called a convenience check. Often sent in the envelope with your card, convenience checks can be used just as you would a personal check (we offer a quick guide to writing a check if you’re in the card age only).

The high costs of a credit card cash advance

The appeal of credit card cash advances is no mystery; When you need cash fast, the convenience of hitting an ATM with your credit card is no small feat. But you should be aware of all the costs before you start entering PIN codes.

As soon as you get a cash advance with your credit card, you start being charged – and in two directions. First of all, the transaction itself will come with a cash advance fee. These charges will generally be a percentage of the cash advance amount, with a typical 3-5% charge.

In addition to transaction fees, cash advances will incur interest charges, just like regular purchases. Unlike regular purchases, however, cash advances do not have a grace period.

No grace period means the cash advance will start earning interest as soon as you complete the transaction. Unfortunately, this means that you will have to pay interest on the cash advance even if you pay back all the money you have withdrawn when your statement arrives.

Not only does interest start accruing immediately, many credit cards also charge a higher APR on cash advances than on purchases and balance transfers. In fact, the APR for a credit card cash advance can easily be 5-10% higher than the normal purchase rate.

It should also be noted that you will not earn any sort of credit card reward on your cash advance. A cash advance by credit card will also not count towards the expenses required for a sign-up bonus.

Cash advances that aren’t actually cash

We have focused primarily on credit card cash advances which involve actively choosing to withdraw loan money from your credit card account. But that’s not the only type of transaction that your credit card can qualify as a cash advance.

Many credit card companies will code certain purchases as cash advances if they consider the purchase to be a cash equivalent transaction. This means that you are buying something that acts like cash.

For example, if you use your credit card to place a bet at a casino or racetrack, your issuer will likely consider that purchase to be a cash advance. Other types of purchases that may qualify as cash equivalents may include money orders, lottery tickets, travelers’ checks, cryptocurrency, and some gift cards.

How to repay a cash advance by credit card

As we discussed above, a credit card cash advance starts earning interest – at a high rate – as soon as the transaction reaches your account. This means you need to repay the cash advance as soon as possible, such as in “don’t even wait for your credit card bill to come in” soon.

If nothing else, try to make more than your required minimum payment each month while you are working to pay off your cash advance. Otherwise, you could earn interest on this advance for a long time.

You see, your cash advance balance is separate from other balances you carry on your credit card, including your purchase balance and the amount you owe on any balance transfer. The card issuer can apply the minimum payment amount to any of your balances, and they usually choose the one with the lowest interest rate.

So by making only the minimum payment, your entire payment can be applied to reduce your purchase balance, while your more expensive cash advance balance does not decrease at all.

If you pay more than the minimum payment, however, the CARD Act – a consumer protection law passed in 2009 – changes that. Creditors are required to apply any amount in excess of your minimum payment to the balance of the upper interest rate, which will likely be your cash advance.

When Should You Get a Credit Card Cash Advance?

Generally speaking, the transaction fees, immediate interest, and high APRs associated with a credit card cash advance mean you should avoid them whenever possible. However, in some cases, this may actually be the best option.

For example, if you need a small amount of cash quickly and are considering a payday loan, a credit card cash advance may be the best choice. Short-term predatory loans will almost always be more expensive than a cash advance with a credit card.

And a credit card cash advance is definitely a better choice than being evicted for not paying your rent or for defaulting on another credit account. Plus, if you’re abroad and need quick access to cash, a credit card cash advance can save your life.

Alternatives to a credit card cash advance

While some situations may require a credit card cash advance, this should never be your first option. Depending on your needs, you may have other choices that make more sense.

On the one hand, you should consider whether you can use your credit cards to make a purchase, rather than a cash advance. Most businesses accept credit cards these days, including many utility and rental companies. While they may charge a processing or convenience fee, it should still be cheaper than a credit card cash advance.

Alternatively, low interest personal loans can be a good way to get the cash you need. They can be especially useful for any large purchase that you might need to pay off over a year or more.

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