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Be careful with cash advances. While your debit card and credit card may seem like similar ways to access money, cash advances come with additional fees and higher interest rates than standard purchases.
- Provides quick access to an unsecured loan
- No request or subscription involved
- Higher APR than for purchases
- No grace period: cash advances start earning interest from day one
A cash advance is a feature offered by many credit cards. Essentially a short term loan, the borrower can receive cash or a cash equivalent typically up to 20% or 30% of the available credit limit on the card. Although some cards allow you to withdraw 50% or more of your available credit limit.
You can also access these funds at an ATM, financial institution, or by writing a convenience check, also known as an access check, mailed periodically on your monthly credit card statement.
Merchants may also view the use of a credit card as a cash advance. Transactions treated as cash advances may include, but are not limited to:
- Initial deposits when opening a bank account
- Overdraft protection when a credit card secures a checking or savings account
- Foreign currency, traveller’s checks or money orders
- Gold or virtual currencies
- Electronic transfers
- Lottery tickets, casino chips and gambling bets
- Certain gift cards and prepaid cards
A cash advance gives access to unsecured funds. However, you will pay compound interest on the advance from the first day the money is extended, plus an upfront service charge. Additionally, most credit card companies only make a portion of your revolving line of credit available as a cash advance. This amount is often printed on your monthly statement which is visible when you log into your online account.
In one look
- Short-term loan from your credit card issuer
- Usually incurs transaction fees and often does not have an interest-free grace period
- Higher interest rates than regular purchases tend to apply
- The amount available for the cash advance is only a percentage of your credit limit
Costs of cash advances
The cash advance fee includes both upfront charges and interest. The initial charge is usually a fixed fee or a percentage of the cash advance, whichever is greater. These fees will be charged to your account on the same day as the cash advance transaction. The current initial fixed charges range from $ 5 to $ 12 or from 3% to 8%.
Most cards do not offer a grace period for cash advances. You will start paying interest from the first day the cash advance is credited to your credit card. For most credit cards, the APR for cash advances is significantly higher than the APR for purchases. Interest rates for cash advances typically range from 18.99% to 29.99% APR.
Some cards designate different APRs for different types of cash advances. Bank of America assigns an APR to direct deposit and check cash advances and a higher APR to bank cash advances, including ATMs, ATMs, overdraft protection, and cash equivalents. Check your credit card terms to find out what to expect from your specific card.
Your cash advance is often limited to part of the revolving line of credit. For example, if you have a credit limit of $ 3,000, your free money is probably $ 600. With a 4% transaction fee and no further purchases on your card, you would pay $ 24 upfront and about $ 13 in interest for a 30-day bill cycle with a common APR of 24.99%. If you only make the minimum payment of $ 27, you would pay almost $ 236 in 32-month interest before paying it off. This means that in total you would pay $ 260 in interest and fees to borrow $ 600.
There are additional costs to consider. Withdrawing a cash advance at an ATM will likely incur charges from the bank or company operating the machine. If you request a cash advance in a foreign currency, foreign transaction fees may also be charged. And if you accessed that foreign currency at an ATM, transaction fees for cash advance, foreign transaction fees, and ATM operator fees may be added to your costs.
The use of convenience checks issued by your credit card provider could result in unexpected charges. If you write a check over your available cash advance limit, your credit company may not honor your check. According to Luke W. Reynolds, chief of the FDIC’s community outreach section, a returned check could result in returned check fees and over-limit fees from your credit card provider.
Reynolds recommends contacting your credit card company before issuing a payday check to make sure the cash advance does not exceed your limit. If you plan to deposit this check into your bank account, he advises you to call the credit provider after depositing the check and the bank before spending the funds to ensure the check has been honored. If the check was not honored and you spend the funds, you may also be charged an overdraft fee by your bank.
Note that cash advance checks are different from promotional APR checks that banks may offer from time to time. Using a promotional APR check allows you to access funds at a lower rate than a cash advance, and sometimes even lower than your regular APR. These promotional APR checks can be a good deal if you have to pay bills with a higher interest rate. If you are not sure what type of check you have, check with your bank before using that check.
Other considerations for cash advances
- Cash advances do not earn reward points
- Convenience checks are less secure and offer less protection to consumers than credit card purchases
- Your credit card may require a PIN to access a cash advance from an ATM
Alternatives to cash advances
If you have good credit, consider a secured or unsecured personal loan from your financial institution. Even with the set-up costs and potential interest, interest rates are generally lower than cash advances. This solution will take more time and will require additional documents. However, if you need more money, a personal loan could meet that need at a lower overall cost.
Retirement Account Loan
You can withdraw the funds you contributed to a Roth IRA at any time without penalty. For tax-advantaged retirement accounts like 401 (k) s or traditional IRAs, you can access funds with an early withdrawal penalty. Both options provide methods for refunding money withdrawn within specific time parameters. Learn more about how the CARES Act changed the rules for retirement accounts during COVID-19.
Negotiate a payment plan
Contact your creditors or service providers if you think you can’t make your payment. If your credit account is in good standing, you may be able to negotiate a lower interest rate. If creditors offer you an extension of payments, make sure you know the fees associated with this service. For other bills like utilities, you can request a payment plan. Due to COVID-19, various resources are available.
Pay your bills with your credit card
If there are bills that you usually pay in cash or by ACH transfer from your checking account, consider putting them on your credit card. While there may be a convenience fee for some purchases, auto, cell phone, and internet bills can usually be billed at no additional cost. This option could free up money in your budget and would not incur the additional fees or higher APR of a cash advance.
Chime is a mobile banking app that offers a few features to get money to you faster.
With direct deposit to your Chime spending account, you have access to the funds on the date Chime receives payment, which can be up to two days before the scheduled payment date. The date your paycheck arrives will depend on when your employer releases the funds.
Each Chime account with at least $ 500 in monthly direct deposits qualifies for up to $ 20 of overdraft protection at no charge on debit card purchases, through a feature called SpotMe. Depending on your account history and other risk factors, Chime may increase the SpotMe limit up to $ 100. (SpotMe does not apply to ATM withdrawals, ACH transfers, Pay Friends transfers, or Chime Checkbook transactions.)
For small amounts, using SpotMe overdraft protection for debit card purchases would incur fewer fees than a cash advance.
Payday loans are short-term, low-value loans secured by a deferred presentation transaction. The borrower provides a post-dated personal check or authorization for a future electronic withdrawal. Although these are called payday loans, the funds can also be secured by other income such as a pension or social security.
While these loans may seem small, often less than $ 500, the fees can be huge. To obtain a payday loan, the borrower agrees to fund a fee often of $ 10 to $ 30 for every $ 100 borrowed. These fees are added to the loan principal on the date of the transaction.
Assuming a finance charge of $ 15 for every $ 100 borrowed out of $ 400, your loans and fees would cost $ 460 by your next paycheck, often within two weeks. If these fees were calculated as an annual APR, this loan charges over 390% interest.
Some states allow lenders to roll over or renew loans if the borrower cannot repay the loan plus fees in full. Depending on the state, these charges may include finance charges, interest, late fees, or insufficient funds charges. The real cost of payday loans means you almost always have better options.
Is a cash advance right for you?
For urgent needs, a cash advance is an easy, but expensive, way to access funds. Make sure you have the necessary cash advance line of credit on your credit card and plan to pay the cash advance as soon as possible. Keep in mind that your cash advance line is usually a limited percentage of your overall line of credit and interest charges start to accrue immediately.
Make sure you understand the fees and consider all of your options. In many cases, there are cheaper alternatives to cash advances.