What You Should Know About Cash Advances

Sometimes in life, we're hit with an unexpected bill or expense that our budget just doesn't cover. While there are a range of different things you could do in this scenario, if you're struggling to come up with the cash, a cash advance could be an option.

A cash advance is a way to get access to the cash you need quickly by using your existing credit card. Though, there are some things to consider before getting a cash advance.

How do cash advances work?

A cash advance is a short-term loan provided through your credit card. When you take out a cash advance, you are essentially borrowing money against your card's line of credit.

Cash advances are quick to apply for, and you can get approval fast, making them ideal for emergencies.  However, cash advances come with high interest and fees, which make them a more expensive way to get the cash you need. 

Do cash advances come with fees?

Most credit card issuers attach fees to cash advances. These fees come in the form of both up-front fees and also interest attached to the balance. 

Up-front fees are usually a flat fee or a percentage of the cash advance amount. If you take the cash out from an ATM, you may also have to pay ATM fees on top of it. 

Another thing to bear in mind is that cash advances don't always have a grace period. This means that interest begins to accrue on the balance as soon as the transaction is completed. 

How can you take out a cash advance?

You can take out a cash advance in a few different ways:

•  At an ATM — You can get a cash advance by visiting an ATM and you made need to use your PIN. If you don't have a PIN, you can request one from your card issuer. 

•  In-person — Another option is to go straight to your bank and request a cash advance on your credit card in person.

•  Convenience check — Some credit cards come with convenience checks, which allow you to write a check to yourself. You can then cash it or deposit it into your bank account. 

Do cash advances harm your credit score?

When you take out a cash advance, there's no immediate impact on your credit score. However, it can affect your score in the long term.

As you will raise your outstanding credit card balance, this will also raise your credit utilization ratio. This is something that credit bureaus use to calculate your score. 

For example, if you owe $500 on a $1,000 card limit, you have a utilization ratio of 50%. However, if you add a $300 cash advance to that card, your balance will jump to $800, which is an 80% credit utilization. This raises red flags on your score as it's a big indicator of credit risk.

How much cash can you withdraw?

Credit card issuers set a cash advance limit for customers, which may be less than your total credit limit. 

When taking out a cash advance, you can borrow up to that limit, so it's worth checking with your individual credit card issuer to see what your limit is.

Cash advance alternatives

Cash advances can be an expensive way to get access to cash quickly. While they can be handy in a pinch, you might want to consider some alternatives, such as:

•  Borrowing money from friends or family — While not always possible, borrowing from someone you know is likely to be a better option to get you through an emergency.

•  Take out a personal loan — While it depends on the lender and your own circumstances, taking out a personal loan could be an option. For those with good credit, a personal loan is worth exploring as you are more likely to get a better interest rate than with cash advances.  Also, the more willing you are to shop around and compare various vendors, the better chance you have at finding a better interest rate.

•  401K Loan —This might be a option to explore (instead of a cash advance) for those who currently have 401K plans available.  Many plan administrators allow participants to borrow a portion of their retirement money.  As of today, the IRS states that participants are allowed to borrow up to 50% of their account balance, or $50,000 (whichever is less).  [DC5] However, there can also be interest and tax obligations related to the loan. [DC6] Consider discussing the options and obligations with your 401k provider before taking out a 401k loan.

Should you take out a cash advance?

The pros of a cash advance are that they're quick and easy to get — they simply add on to your existing credit card, and you don't have to go through a long approval process. 

However, there are downsides that mean it's not ideal for regular use. With high fees and interest rates, plus the potential impact on your credit score, it's usually best to choose another method of accessing cash.

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