When you need cash fast, a credit card cash advance can feel like a quick fix. But advances come with higher rates, fees, and interest that starts on day one. If you’re already carrying balances, a cash advance can make it harder to become debt-free. Here’s what to know about cash advances, plus less risky alternatives you can try.
When you use an ATM, a debit card withdrawal pulls your money from a checking or savings account. You might pay a small ATM fee, but there’s no loan involved.
A credit card cash advance is different. It’s a small, short-term loan against your card’s cash line. You’ll owe a cash advance fee, a higher APR than purchases, and interest starts the day the advance posts.
People usually consider a cash advance when they need cash fast for things a card won’t easily cover, like:
Here's why it is better to forego having cash in your pocket for a few days than to use your credit card to get a cash advance.
When you withdraw cash from your credit card account, you are getting a loan from your credit card company. And it's not even a loan with good terms. It usually comes with:
The reality is that credit card cash advances are one of the most expensive loans.
A cash advance does not grant you the luxury of a grace period. As soon as the transaction clears, it starts accruing interest. You can wait out the full billing cycle to pay the advance back in full, but you will save money by paying it back as soon as you can.
Because its interest is immediate, high, and persistent, a cash advance can fast-track you to credit card debt. If you’re trying to become debt-free, this can torpedo your hard work.
Cash-advance debt is hard to pay off, especially if you only make minimum payments. Under Regulation Z (CARD Act), if you make more than a minimum payment, the credit card issuer must apply payments made above the minimum to the highest-APR balance.
If you only make the minimum payment, the card issuer is free to decide how to allocate that payment according to its terms.
That means that if you consistently pay only the minimum amount on your credit card, you will not be paying down your cash advance and it will continue to accrue interest at the higher rate for a longer period of time. That will, in turn, sink you further into debt.
Let’s say you owe:
Your minimum payment is $40. If you pay only $40, the issuer can apply your payment however its terms allow. This means that little (or none) may hit the 30% cash-advance bucket, so it keeps accruing expensive interest.
Your card has a separate cash-advance limit that is usually smaller than your total credit line. The exact amount varies by issuer and account, but in some cases it may be several hundred dollars or less. On top of that, ATM and daily caps can limit each withdrawal, so you may only get a few hundred dollars at a time.
If you’re facing a big expense, that may not fix the problem. And once you add cash-advance fees and higher interest with no grace period, the debt can grow fast.
With a credit card cash advance, you accrue interest in its worst form. It makes up the bulk of the cost of your debt, and it can throw a wrench into even the best thought-out financial plans. As your interest grows, you may feel like your debt is spiraling out of control. However, effective debt relief focuses on eliminating high-APR debt as quickly as possible.
If you’re considering a cash advance, you probably need money today. In a crunch, choose the option that keeps costs down and prevents a debt spiral. Here are a few alternatives to consider:
What should you do if you have already taken out cash advances and you find yourself in a downward debt spiral? ClearOne Advantage is here to help. Our certified debt specialists work with clients just like you every day to find debt relief solutions that really work. If you would like to learn how to get out of credit card debt, call us today at 1-888-340-4697 and get a free savings estimate.