Before You Get a Credit Card Cash Advance, Read the Fine Print

Photo by Karolina Grabowska on Pexels

Being able to use your credit card to get cash may sound pretty convenient. And this can be especially the case if you have an upcoming expense that can't be paid for with a card.

However, it's important to understand that credit card cash advances work differently than regular purchases on a credit card. In fact, a cash advance can be one of the costliest ways to access emergency cash.

How does a credit card cash advance work? And are there any situations where taking out a cash advance could make financial sense? We examine their risks and potential advantages below.

What is a Credit Card Cash Advance?

Let's say that you come home one day from work and notice that your A/C isn't working. You call a local repairman who quickly identifies the issue as a relatively minor one that can be fixed for $300. You're relieved that you won't have to replace your entire AC unit. But to your dismay, the repair shop informs you that they only accept cash or check payments.

You don't currently have $300 available in your checking account, and it will be three more days before you receive your next paycheck. You were planning to use your credit card to pay for the repair as your current balance is well below your credit limit. But unlike most debit cards, credit cards don't provide cash access. Or do they?

You call your credit card company, explain the situation, and the customer service representative says that he has good news. Your credit card comes with a "convenient" cash advance feature. You can simply visit your bank or a supported ATM near you and use your credit card to make a cash withdrawal. It's as easy as that!

It turns out that many credit cards do allow you to borrow cold, hard cash against your credit limit in this way. But the price that you pay for this added convenience can be a tough pill to swallow. Let's look at some of the fine print you'll want to pay attention to before you decide to take out a credit card cash advance.

What Cash Advance Fine Print Should You Read?

A credit card cash advance will almost always be more expensive than using your card to spend the same amount in-store or online. One reason for this is that cash advances typically start accumulating interest immediately while interest charges don't usually kick in on purchase transactions until after a grace period.

But exactly how much you pay for a credit card cash advance will vary based on the fine print of the specific credit card that you own. Here are the three main factors that can impact the cost of cash advances:

Interest rate (APR): In most cases, the APR for a cash advance will be higher than your card's standard APR.
Cash advance fee: Most credit card issuers charge a transaction fee on cash advances. This fee may be a percentage of the amount advanced, often ranging from 3% to 5%. Or it could be a flat fee, often between $5-$10. Still, other cards use a combination of these two fee structures. For example, cardholders may be charged the greater of 5% or $10 for their cash advance transactions.
Third-party ATM or bank fee: In addition to your card company's fee, you can expect the third-party bank or ATM provider to charge a transaction fee as well. You can check out the out-of-network ATM fees for a few bank and ATM providers online to search for the lowest-cost option.

Cash advance fees and third-party fees are easier to calculate as they're only charged once. But the amount you pay in interest on the cash you borrow will depend on how long it takes you to pay back the balance. The quicker you're able to pay off your advance, the less you'll pay in interest charges.

The last piece of fine print that you'll want to examine is your credit limit because your cash advance line may be lower than your overall credit limit. If you only need enough cash to buy some produce at a local farmer's market, the lower limit shouldn't be an issue. But if you're, say, trying to pay for a car repair, you'll want to check to make sure that you can withdraw enough cash to cover the entire expense.

Are There Better Ways to Borrow Cash?

A credit card cash advance can actually be a more cost-effective emergency cash option than payday loans, which often charge upfront fees that equate to APRs of nearly 400%. A cash advance can also be more accessible to those with recently damaged credit than applying for a personal loan as it doesn't require a new credit check.

However, there may be other ways to borrow cash that are more flexible and less expensive. One example is this program which allows eligible cardholders to borrow against their credit limit at a lower interest rate than the card's standard APR for purchases. These loans don't require a new credit check, come with no fees, and the money is deposited directly into your bank account. However, the minimum loan amount is rather high at $500.

Want to use a peer-to-peer payment app to send money to a friend or contractor but don't have enough cash in your bank account to cover the transaction? With this product, you can use your credit card to make Venmo or PayPal payments without having to pay the standard credit card fee. A linked bank account isn't required and the transactions are treated like purchases rather than cash advances.

Finally, you may want to consider using a third-party payment service. With Plastiq, for example, you can pay virtually any expense with a credit card (even things like utilities or rent) and your recipients are paid in the way they prefer (ACH, paper check, or wire transfer). Plastiq's 2.85% fee is lower than most credit card cash advance fees. And since their transactions generally process as purchases, you should receive your card's standard APR and grace period.

The Bottom Line

A credit card cash advance can be an expensive way to borrow cash. Despite this, a cash advance could be worth considering if it would help you avoid predatory borrowing options such as payday loans and if you're confident that you'll be able to repay the borrowed amount quickly.

But most cardholders will have better options at their disposal for using their credit card to cover cash-only expenses. Still, it's important to note that even the best of these options will still involve paying interest if your card's statement balance isn't paid in full by the due date.

Ultimately, the best way to avoid interest and fees on expenses that require cash payments is to build up your reserves in your bank account. Check out our guide to establishing an emergency fund to find tips to help you reach your savings goals faster.

Clint Proctor

Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. His work has been featured in several major publications including Business Insider, U.S News and World Report, Yahoo Finance, and Forbes.