At some point in your adult life you’ve probably heard that taking out a credit card cash advance is a bad idea. The main reason being — credit card cash advances are incredibly expensive. But is there ever a situation when it makes sense to take out a credit card cash advance?
We’ll get to the pros and cons of credit card cash advances shortly. First let’s look at the process of obtaining an advance, their limits, as well as the fees involved.
To summarize, most credit card providers offer cardholders the convenience of a cash advance, in addition to everyday purchases. Putting that advance into your pocket is no more difficult than taking your card to an ATM machine or writing a check at your bank. But the cost of this convenient way of taking out a cash advance is quite high.
While turning to credit card cash advance isn’t ideal, it makes sense when your money problem is a completely unpredictable and an urgent emergency.
The convenience and cost of credit card cash advances
The process of obtaining a cash advance is relatively simple. A credit card will work at most ATMs the same way as a debit card. Credit card companies also provide cardholders with cash advance opportunities by using credit card checks, which often accompany monthly statements received in the mail. Once the cash is dispensed though, the ease of that no muss no fuss convenience is soon replaced by the creeping and palpable pain of its high cost.
The limits for a cash advance are usually indicated in your online billing or paper credit card statements. Depending on the card issuer, this may be referred to as a Cash Credit Line or a Cash Advance Limit. The advance limit will always be less than the total credit limit. A general rule of thumb is the cash advance limit is about 20 percent of the total credit limit. For example, a card with a total credit limit of $10,000 would carry a cash advance limit of roughly $2,000.
When a credit card is used to pay for goods or services, the merchant pays the issuer a variety of transaction fees. These fees are usually unknown to the consumer, and the prices charged for the goods or services are higher to reflect the payment of these fees.
In the same way, the issuing company charges the cardholder a variety of fees when its card is used to provide a cash advance. The following example is typical of the actual pricing and terms for a credit card offer specifically applied to cash advances:
Transaction fees: $10 per transaction or 3 percent of the advance, whichever is greater.
Interest rate: APR charges of 19 percent to 24 percent, depending on the creditworthiness of the cardholder. Unlike merchant purchases, interest charges apply starting on the first day of a withdrawal.
ATM usage fees: the average ATM charges a fee of around $2.50 per transaction, according to the American Bankers Association.
Using the above information, if the cardholder wanted a $100 cash advance for one month, the total fees associated with the transaction would include:
Transaction fee: $10.00
Interest charges: $2.00 (assumes an APR of roughly 24 percent)
ATM usage fee: $2.50
In the above example, the total of all fees for the $100 cash advance is $14.50 — or a premium of 14.50 percent for use of that money for a month, which should demonstrate how costly this convenience can be for the cardholder.
Charging fees totaling nearly 15 percent to borrow money for one month means this proposition has plenty of cons and only one pro. The big disadvantage of this transaction is the cost. The fees, coupled with the relatively high APR charged on this loan, make a cash advance very expensive.
Using a credit card is convenient; unfortunately it’s sometimes too convenient. Using a credit card to pay off the balance on another card or a loan is a bad idea. A cash advance on a credit card is perhaps one of the most costly legal loans in the marketplace today.
There is only one circumstance under which an advance makes any sense at all. When all other options have been exhausted, and an emergency source of cash is still needed, then it’s okay to use a credit card.
Other expensive loans
Payday loans are quick, often closing the same business day. They are convenient, too. You can typically get them online. Best of all they do not usually require good credit or any type of collateral and they may improve your credit score. But the convenience and speed of payday loans come at a high cost. Fees can reach up to $40 or more for every $100 that you borrow, which is extremely expensive compared to traditional loans. It’s not uncommon for lenders to advertise 14-day loans for $100 that come with a fee of $17.65 — an APR of 460 percent! These loans have to be paid back within a couple of weeks. If you miss your deadline, they get really expensive. It’s a good thing most payday loans are limited to $1,500 or less.
Like payday loans, auto title loans do not usually require good credit. Title loans often come with higher limits than traditional cash advance or payday loans. As with payday loans, quick repayment of title loans will also help improve your credit score. These loans are typically just as expensive as payday loans. The reason title loans have higher loan limits than payday loans is because they are usually secured with the title to your automobile. If you repay the loan you’ll lose your car.
Then there’s the Bank of Dad or Mom. These types of loans come with no fees and usually have low interest charges, if any at all. But borrowing from family or friends poses a big risk to relationships far more important than a transient need for a bridge loan.
In the end, if an emergency is the only good reason to consider a credit card cash advance, the one viable alternative is to anticipate the emergency. You can do this by keeping up to date on zero interest credit card promotional offers. Since it typically takes a week or two to get approved for a new credit card (although sometimes it’s instant), you have to plan ahead and have this kind of credit approved and the card on standby when the emergency happens. Even then, it usually will only provide zero interest on purchases — not cash advances.
Taking out a credit card cash advance means you probably don’t have enough stashed away in your emergency fund. Be smart and start putting a little away each month, and if you end up taking out a cash advance from your credit card, be sure to find out how much it costs and pay it off as quickly as you can!