It’s not uncommon to find yourself in need of extra cash. This tends to happen more often if you are known for carrying around credit cards and usually forego getting cash at the bank or your local ATM. Sometimes, you can find yourself shopping or dining at a place that doesn’t accept credit cards, or the cards you use. In that situation and in others, it may seem like a smart decision to get a credit card cash advance. However, it really isn’t the best option because it can adversely affect your finances.
What is a Cash Advance?
A cash advance is generally a short-term loan that you take out on your credit card account. To get one, you simply go to an ATM or teller at the bank, deliver your credit card and come away with cash that comes out of your credit card account. While it entails a simple process, a cash advance can deliver a negative impact because it carries higher interest rates and fees. Here are things you can expect when you make a cash advance on your credit card:
- Cash Advance Fee: There is generally a onetime fee charged on your account when you get a cash advance. Typically, this fee ranges from three to five percent of the total amount you take out. In other words, if you take out $200, you will be charged a fee of $6 to $10, which gets added to your credit card account balance.
- Higher Interest Rate: It is very common for credit cards to charge a higher APR for cash advances. These charges are even greater than those on purchases.
- No Grace Period: Traditionally, a credit card gives you a grace period of around 20 days to pay off a purchase before you are charged interest. However, with cash advances, there is no grace period and you begin to accrue interest immediately.
- Lower Credit Limit: There are separate credit limits for cash advances on credit cards. These tend to be lower than you regular credit limit for purchases.
Alternatives to Cash Advances
There are alternatives to cash advances that might be more beneficial to you. Here are a few options for getting quick cash:
- Overdrafts on Checking Accounts: An overdraft on your checking account can cost between $25 and $35 if you allow your account to go negative, even if you authorized your bank to allow you to make withdrawals regardless. It’s possible to opt out of this situation, but you can use it to get hold of cash on the short term. At the same time, it’s advisable to be wary because some banks charge extended fees for overdraft.
- Early Withdrawal from Certificate of Deposit: You can also get cash quickly by making an early withdrawal from a certificate of deposit or CD. It’s important to keep in mind that CDs are used for long-term deposits, however, which means you can face early withdrawal penalties. In the worst case scenario, your CD can be cancelled as a result.
- Personal Loans: A personal loan involves a lot more details than the other options as it requires you to go to a bank and apply for it. Interest rates on them tend to be lower than that on the majority of credit cards, but there are considerably higher short-term rates on personal loans.
When is it Appropriate to Get a Cash Advance?
In some instances, a cash advance may be more preferable than other options for obtaining cash fast. It can be the least expensive, but it’s better to opt for a bank account that doesn’t have overdraft fees. Regardless of any option you choose for getting fast cash, it most likely won’t be free. Any time you get a cash advance from your credit card, be sure to pay it back as soon as possible to avoid accruing too much interest.
If you have a credit card that has no cash advance fee, it makes getting a cash advance even better. In that scenario, the only thing you have to worry about is paying back the interest. It can even possibly be cheaper than withdrawing cash from your debit card, in some cases. For example, if you are traveling in another country and have a credit card with no cash advance or foreign transaction fees and a debit card that includes a foreign transaction fee of around three percent, you can benefit more from using the credit card as long as you pay the cash advance off quickly.
The Best Scenario of All
The best scenario of all is to have emergency funds set aside. It can prevent you from needing a cash advance in the first place. If you only get cash advances because you forget to take out cash, you can benefit from getting a debit card that has no ATM fee. It would ensure that you can quickly withdraw cash without high charges.
At the end of the day, cash advances are not the best idea. There are plenty of alternatives that are far better for your wallet.