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Cash Advance Credit Cards The Not-So-Hidden Costs When You Get Cash from a Credit Card

  2. Credit Cards
  3. Understanding Cash Advance Credit Cards & Their Costs
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Jack Hungelmann
Melinda Opperman Chief Relationship Officer, Credit.org View bio

This guide was written by

Jeff Ostrowski

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Many Americans live paycheck to paycheck, with no rainy day fund to cover unforeseen expenses. Small wonder a surprise car repair or an unanticipated medical bill can create a financial emergency. If you find yourself in that situation, you might be tempted to fill the money gap by taking a cash advance from your credit card. Cash advances can be useful in some situations, but credit card cash advances are inherently risky — and, with their steep interest rates and extra fees, the costs can mount quickly.

Why You Might Want to Get Cash from a Credit Card

A credit card cash advance is a definite no-no for many situations and places — casinos and bars, for example. And in an increasingly cashless society, it grows harder by the day to envision a scenario in which you need cash so badly that you absolutely, positively have to take the hit for a credit card cash advance. But there are situations when a cash advance is the least-bad scenario.

Reason one

Your rent is due and your bank balance is near zero. Bouncing a check to your landlord is a bad idea. Your bank will hit you with a $35 overdraft fee. Your landlord might charge you a returned-check fee and a late payment fee. And the missed payment could wind up on your credit report. A large landlord often will take credit cards but is likely to charge a small fee. A "mom and pop" landlord will probably want a check or cash, in which case a cash advance could make sense (although a PayPal payment via your credit card would be cheaper, if your landlord would accept it).

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Reason two

Your child care payment is due. As with the rent scenario, bouncing a check to your babysitter is an expensive mistake. If you'll lose your job without child care, the costs of a credit card cash advance might be worthwhile (again, a PayPal payment via your credit card would be cheaper).

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Reason three

You're traveling abroad and run into a glitch — perhaps your card doesn't work at your hotel or restaurant — but the ATM around the corner will give you a cash advance. Be warned: Your credit card issuer is likely to impose foreign transaction fees atop the other fees.

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The Risks of Cash Advances

There's a reason credit card companies make cash advances easy to get: They're a good deal for credit card companies. But they're not such a good deal for you. Credit card users seem to grasp this reality. Even in the depths of the Great Recession, fewer than 4 percent of credit card accounts incurred cash advance fees, according to a report by the Consumer Financial Protection Bureau. For the small number of credit card users who take cash advances, the practice can be a sign of trouble, says Melinda Opperman, chief relationship officer at Credit.org, a nonprofit that offers financial education and coaching. "It ends up being a debt trap," Opperman says.

Among the downsides are the following:

A high APR (Annual Percentage Rate)

Interest rates on cash advances can be significantly higher than interest rates on normal credit card balances. For instance, Citi's card for college students charges an APR of 14.24 percent to 24.24 percent on regular purchases. However, for cash advances, the rate is 25.49 percent — more than 11 percentage points higher than the best rate for purchases. BankAmericard's interest rates are almost identical. Merrick Bank charges its credit card holders as much as 34.7 percent on cash advances.

Lower credit limits

Rules vary, but credit card issuers often impose lower limits on cash advances than on card purchases. So if your credit limit is $5,000, your cash-advance limit might be only $2,500. And for a single ATM withdrawal, you might be further limited to $500.

Good deals are rare

If you expect to need cash advances, you'll have to look hard for a credit card that doesn't squeeze you for fees. PenFed Credit Union's Promise Visa Card , for instance, charges no fees for cash advances, and the APR is the same for purchases or cash advances (based on creditworthiness).

No grace period

When you make a credit card purchase, you get a grace period of at least 21 days (and as long as 50 days) before the issuer begins charging you interest. But with cash advances, your card company starts charging interest immediately, according to the Consumer Financial Protection Bureau.

Hefty fees

In addition to the high interest rates collected on cash advances, credit card issuers collect additional fees. The Citi card for college students and BankAmericard both charge amounts that are typical of credit card companies: A fee of $10 or 5 percent of the amount of the cash advance, whichever is more. So if you take a $100 cash advance on your card, your fee will be $10 — 10 percent of the amount you're borrowing, even before you pay the 25 percent interest.

A hit to your credit score

High fees for a cash advance can push you to the brink of your credit limit. That, in turn, can ding your credit score. Taking a large cash advance also may mean you're using more than 50 percent of the available credit on your card, which can further hurt your credit score.

Alternatives to a Cash Advance on Your Credit Card

We've established that cash advances generally aren't a great deal. There are other, less costly alternatives, including the following:

A purchase on your credit card

You'll pay a fee for a cash advance plus a higher interest rate, so why not just use the credit card to make the purchase? Credit cards are so widely accepted that this is often a better alternative than taking a cash advance, Opperman says. And if you have enough available credit on your card to take a cash advance, you clearly have enough to make a purchase.

A credit union loan

Credit unions have begun marketing payday alternative loans (PALs), ranging from $200 to $1,000, to their customers. Because credit unions are nonprofits, they offer favorable terms. Application fees are limited to $20, and the annual percentage rate is capped at 28 percent. One downside: You must be a member of your credit union for a month before you're eligible for a payday alternative loan, which is inconvenient if you truly need the money now.

A loan from your 401(k)

Most 401(k) plans allow you to borrow money against your balance. But make sure you pay yourself back, with interest. If not, the IRS considers the loan a taxable distribution, which means you'll have to pay normal taxes plus (if you're under 59 ½) a 10 percent penalty. What's more, you're depleting your retirement savings and missing out on market appreciation.

A Roth IRA loan

The IRS doesn't allow loans from traditional IRAs, but you can borrow from your Roth IRA. Because Roth IRAs are funded with after-tax money, there's no tax penalty. But, as with a 401(k) loan, you're dipping into retirement savings and foregoing potential appreciation.

A home equity loan

Have equity in your house? You could tap your home equity for cash. These loans are typically cheaper than credit cards, which is an advantage. However, the closing process might take a month or more, and you'll have to pay hefty fees and closing costs. What's more, if you default, you could face foreclosure. In general, a home equity loan is thought to make sense for a $15,000 renovation, but not for a $1,000 appliance replacement. See MoneyGeek's guide to home equity loans.

If you have a home equity line of credit, or HELOC, you can also borrow against it, taking only what you need at the time. Again, it's crucial to make your monthly payments on time and pay your balance down to zero as soon as possible; defaulting on a HELOC can also result in foreclosure.

A peer-to-peer loan

A new breed of lenders offers small personal loans. SoFi, for instance, charges fixed rates of 5.95-14.24 percent for personal loans. Peer-to-peer loans tend to be cheaper than credit cards, and underwriting is more forgiving for borrowers with spotty credit histories. However, these loans aren't regulated as tightly as credit cards and banks, Opperman warns.

A loan from friends or family

Mixing business and personal dealings is tricky on many levels. "It requires a level of humility on your part," Opperman says. Friends and family won't report your late payments to credit bureaus, and they likely won't extract double-digit interest. But if you value your relationships, it's essential to make good on the loan. If you don't pay it back, the betrayal of trust may sour your friendship, and family gatherings can get tense. Opperman suggests formalizing the transaction with a promissory note drafted from a template, as well as an agreement to pay your benefactor a small interest rate.

A bank personal loan

Banks have become notoriously stingy with small loans in recent years, but it's an option worth exploring. Wells Fargo, for instance, offers personal loans in amounts ranging from $3,000 to $10,000. Interest rates are 6.49 to 19.99 percent. The shakier your credit history, the higher your rate will be.

Find extra income

If your financial squeeze is truly temporary, look for a quick way to make some extra cash. Ask your boss for extra hours. Rent out a room in your home. Take a part-time job on weekends. Delve into the gig economy by driving for Uber or Lyft. Sell some collectibles on eBay.

Alternatives to Avoid

A credit card cash advance isn't the wisest way to borrow money, but there are other alternatives that are even more expensive. Consumer advocates say payday loans and title loans are last-resort sources of cash when you have no other choice.

Payday Loan

These short-term loans can trap consumers in debt with rates of 400 percent or more, says the Consumer Federation of America. In a typical payday loan, you write a check to the lender for the amount you want to borrow, plus a fee. Many borrowers are so strapped that they can't repay the full amount, meaning they make biweekly interest payments at astronomical rates. The Consumer Federation points to the example of a 69-year-old warehouse worker who borrowed $300 from Advance America. Unable to repay the original loan, he paid interest of $52.50 every two weeks for years. In just one year, the interest on the original $300 loan amounted to $1,365, a rate of 455 percent.

Title Loan

This type of debt uses your vehicle as collateral for a short-term, high-rate loan. "It is a very expensive form of credit," the Federal Trade Commission warns. Lenders typically charge an interest rate of 25 percent a month, which translates to an annual rate of 300 percent. A 30-day title loan for $500 would come with a typical finance charge of $125. And the FTC warns that title loans often come with additional fees or add-ons that boost the interest rate even higher.

It's best to avoid these methods of getting cash altogether.

How a Cash Advance from a Credit Card Works

Credit card issuers make cash advances quick and convenient, although they come with plenty of fine print limiting how much you can take.

Here are the three ways you can take out a cash advance:

From an ATM

You can take your credit card to an ATM and use it to make a withdrawal.

From a Bank

You can take your credit card inside the bank and make a withdrawal from a teller.

From a Convenience Check

Credit card issuers also send "convenience checks" that can be written out against your credit card just like you would with your checking account. These often come with no-interest teaser periods and can be used for purchases or balance transfers.

Here are some common questions consumers have:
  1. What if my card is maxed out?

    In that case, forget it. Credit card issuers know cash advances signal risky behavior, and they won't issue cash advances beyond your credit limit.

  2. What limits apply?

    Rules for cash advances vary from one card to the next. Banner Bank's MasterCard, for instance, limits cash advances to half the overall credit limit. A single ATM cash advance is capped at $500. But the bank lets card holders write convenience checks for up to the full amount of the credit limit.

  3. Where do I find the terms and conditions that apply to cash advances?

    You probably received a printed copy of your cardholder agreement when you got your card. If you no longer have it or the document is out of date, you should be able to find the cardholder agreement online. Your card issuer's customer service department might also be able to answer your questions.

Best Practices When Getting a Cash Advance

A cash advance isn't ideal, but it's also not a sure path to bankruptcy. If you truly need a cash advance, take measures to limit the risks. Follow these savvy steps to contain the damage:

Understand the pros and cons

Between fees and high interest rates, a credit card cash advance costs a lot. However, if your finances are dire, a cash advance is a better option than a payday loan or a title loan.

Look for the best deal

Rates and fees vary from one card to the next. If you have multiple credit cards with available balances, dig into the cards' policies to see which one offers the least painful terms for cash advances.

Pay it back quickly

There's no grace period on cash advances, and the interest rate is steep. Don't take a cash advance and then just forget about it.

Have a long-term plan

If you're facing a legitimate emergency and the cash advance is your best option, take it. But don't make it a habit. "Come up with a plan so this isn't a recurring situation," Opperman says. "Continuing to take out debt is often just masking a larger problem."

Start an emergency savings account

A cash advance is a red flag that you need to create a budget, set up a rainy-day fund and, perhaps, seek credit counseling.