An emergency fund can be a lifesaver when you need cash quickly.
If you haven’t gotten around to saving one yet, you may be wondering what the best way is to get cash in a pinch.
While you could apply for a loan or sell your stuff online, taking a cash advance from one of your credit cards is a more convenient choice.
There’s no credit check involved and you can have cash in hand the same day you need it.
Quick answer: Most credit cards allow you to get a cash advance through an ATM -- a feature that may come with fees and high interest rates.
That’s a plus when you’re in a financial bind but there are some downsides to consider.
Keep reading for all the details on what a cash advance is, what the pros and cons are and how to decide if a cash advance is right for you.
What is a Credit Card Cash Advance?
When you use your credit card to make a purchase, you’re essentially borrowing against your available credit.
A credit card cash advance is similar, although instead of buying a product or paying for services, you’re pulling the cash right from your credit line. You then pay back the advance the same as you would a purchase.
There are a couple of ways to get cash from a credit card.
For example, you can use a convenience check if your credit card company mails you one. You simply write the check out to yourself for the amount of cash you need, take it to the bank and cash it.
Alternately, you could deposit it straight into your bank account. Just remember that it may take a few days for the check funds to be available.
The other option is to make a cash withdrawal using your credit card at an ATM.
You’ll need a unique personal identification number (PIN) to make the withdrawal. If you haven’t set up a PIN with your card issuer, you’ll need to do that before hitting the ATM.
Credit Card Cash Advance Limits
In terms of how much cash you can withdraw from a credit card, that ultimately depends on your credit card company.
Generally, your card issuer will limit cash advances to a percentage of your total credit line. So for example, if you have a $5,000 credit limit, you may be able to withdraw $2,500 of that for a cash advance.
You should keep in mind, however, that if you already have a balance on the card from previous purchases, that shrinks the amount of cash you can withdraw.
Unless you have a very high credit limit, you most likely wouldn’t be able to get as much money from an advance as you would by taking out a loan.
The tradeoff is the convenience factor. Ultimately, you’d have to weigh that against how much money you need.
Tip: If you’re thinking about getting a personal loan, check out MyBankTracker’s recommendations for the best personal loan lenders.
How Much Does a Cash Advance Cost?
When you’re considering a credit card cash advance, there are two numbers to think about: the cash advance fee and the annual percentage rate (APR).
Typically, cash advance fees range from 2 to 5 percent of the advance amount, or a minimum dollar amount.
For example, your card may charge 3 percent or $5, whichever is greater. That means that for a $1,000 advance, you’d pay a $30 fee.
If you’re using a convenience check, the fee is charged to your account once the check clears. It works a little differently if you’re taking an advance at the ATM.
In that scenario, you’d pay the fee up front when you’re taking the advance. You’d also be on the hook for paying any surcharges the bank tacks on for using their ATM.
Aside from that, there’s the APR to consider. Generally, credit card companies charge a higher APR for cash advances than purchases.
For instance, you might have a regular variable APR of 14.99 percent for purchases but the cash advance APR may be 24.99 percent.
That’s a big difference and it’s not one you can afford to overlook. Unlike purchases, there’s no grace period for cash advances. That means interest starts accruing as soon as the advance is complete.
The longer it takes you to pay the advance off, the more you’ll fork over in interest.
If you’re only paying the minimum due each month, a cash advance can easily become a very expensive way to borrow.
When Does a Cash Advance Make Sense?
Now that you know how cash advances work and what the advantages and disadvantages are, the question is, when should you use one?
Because of the fees and the higher APR involved, a cash advance really only fits when you have a true financial emergency and you’ve exhausted all your other options.
For example, your car leaving you stranded on the side of the road qualifies as an emergency. Wanting a new pair of shoes doesn’t.
A cash advance is also more appealing than other short-term borrowing options, such as a payday loan, title loan or pawn shop loan.
While there are usually very few obstacles to getting money through these avenues, the effective interest rate can easily be in the triple-digit range.
Not only that, but these kinds of loans can lead to a cycle of debt that can be difficult to break out of.
If you’re planning to move ahead with a credit card cash advance, here are a few best practices to keep in mind:
- Calculate the fee so you know what you’re paying.
- Be clear about the APR and compare rates with different cards to find the best deal.
- Limit cash advances to only what you need. Don’t be tempted to take a larger advance simply because you have a higher cash advance limit.
- Create a plan for repaying a cash advance as soon as possible.
- Think about transferring the balance to a different card to bring the interest rate down. Look for a balance transfer card with a 0 percent introductory APR but be aware of the balance transfer fee, if there is one.
Cash Advance Alternatives
Cash advances are fast but they’re not exactly cheap. Before you commit to a credit card advance, consider these other ways to borrow when you have a money emergency:
Personal loan from an online lender
Banks can be a good source for personal loans but funding isn’t always speedy. An online lender, on the other hand, can approve and fund your loan within one to two business days.
There is one potential downside, however. If you don’t have great credit, your interest rate may be comparable to what you’d pay for a cash advance.
Borrowing from friends and family
Turning to your circle of friends and family allows you to avoid the rigors of applying for a loan. Assuming they’ve got cash to lend, you shouldn’t be sacrificing anything in terms of speed either.
Just be sure you can pay the loan back since defaulting could put your relationship at risk.
Credit union loan
Heading to your local credit union is another option when you need a loan. Credit unions tend to be a bit more flexible than banks when it comes to smaller personal loans.
The rates may be better than what the bank offers but double-check to see how long funding takes if you’re pressed for time.
Home equity line of credit
If you own a home, you could have a source of cash right in front of you. A home equity line of credit can be drawn against over and over again, as long as you have available credit.
The interest rates are typically much lower compared to a credit card.
There is one caveat
Home equity lines of credit are secured by your home. If you skip out on repaying what you owe, you put yourself at risk for losing the home to foreclosure.
Tap your retirement accounts
When you have some flexibility in how quickly you need funds or you need to borrow more than what you can get from a credit card or the bank, a 401(k) loan could be the answer.
You could also withdraw money from an Individual Retirement Account (IRA). What you have to be careful of here are the tax implications.
If you don’t repay a 401(k) loan on time, it becomes a taxable distribution.
If you’re pulling money out of an IRA before age 59 ½, you may pay a 10 percent early withdrawal penalty, plus regular income tax on what you withdraw.
Make Saving for Emergencies a Priority
Having to take a cash advance or rack up another form of debt when you need funds isn’t ideal. Instead, you should have a sufficient amount of money tucked away in an emergency fund in case life throws you a curveball.
If you don’t have any savings squirreled away, it’s time to get moving.
Set a target for how much you want to save. Three to six months’ worth of expenses is a good goal but if you need to start smaller, aim for $500 or $1,000 and build up from there.
Examine your budget to decide how much you can afford to save each payday and be consistent. Schedule automatic transfers from your checking account to your savings account.
Building the savings habit can take time but you’ll thank yourself the next time you hit a financial rough spot.