When you’re running low on funds but need cash right away, getting a cash advance from your credit card is a quick and convenient way to get the money you need. Unfortunately, a cash advance comes at a high cost.
Before using your credit card for a cash advance, it helps to know the steps you can take to minimize the costs of a cash advance.
How does a cash advance work?
Essentially, a cash advance is a loan of money from your credit card, with a maximum amount equal to your available credit. Typically, you get a cash advance from an ATM or through a bank that works with your credit card’s payment network (Visa, Mastercard, American Express, or Discover).
While it is easy to get a cash advance, it is also quite expensive. Consider these factors that increase the cost of a cash advance:
Regardless of how you take a cash advance, you will need to pay a transaction fee, typically 3-5%. Currently, the transaction fee for the Chase Sapphire Preferred® card is 5% or $ 10, whichever is greater. This means that if you take out a cash advance of $ 300, the transaction fee will cost you $ 15. Incidentally, the transaction fees are the same for three other major credit cards: Discover it® Cash Back, Citi® Double Cash Card, and Blue Cash Preferred® Card from American Express.
The APR for credit card cash advances tends to be considerably higher than the APR for regular purchases.
Consider this: The current average credit card interest rate hovers around 16%. While your card’s APR for regular purchases can be higher or lower, one thing is for sure: the average 24.80% APR for cash advances is significantly higher.
Before getting a cash advance, do your due diligence and run the numbers to figure out your true cost.
No grace period
Many responsible cardholders are surprised to learn that credit card companies do not grant a grace period for cash advances the way they do for regular purchases. Instead, the interest starts going up the moment you take a cash advance.
How to get a cash advance from a credit card
To set up the cash advance option on your credit card, call the customer service department of your card issuer and obtain a PIN code. You can then go to an ATM and use your card and PIN, just like a debit card, to get money. The only difference at the ATM is that you will select the cash advance option rather than choosing your savings or checking account. You will then enter the amount of money you wish to withdraw.
Of course, you won’t be able to access more than your available line of credit. In fact, credit card companies usually limit your daily cash advance amount to a few hundred dollars. In other words, if you need more than a few hundred dollars to deal with an emergency, a cash advance may not be a reliable option.
How to Minimize the Cost of a Credit Card Cash Advance
While transaction fees and high interest rates drive up the costs of a credit card cash advance, you may want to consider one as an option of last resort to deal with a financial situation of. emergency. In this case, it helps to understand how to limit the costs of a cash advance.
Borrow as little as possible
The perfect way to minimize cash advance fees is to borrow only the absolute minimum you need. The smaller the amount of your cash advance, the less fees and interest you will have to pay. Remember that a cash advance is simply a loan from a bank. The best way to speed up the process is to avoid taking a huge amount of money at first.
Pay off your cash advance as quickly as possible
Since your advance starts earning interest the same day you receive your money, start paying off the amount you borrow as soon as possible.
If you are taking a cash advance of $ 200, try to pay that amount in full or as much as possible in addition to your minimum payment. Make a goal of repaying the amount in days instead of weeks. And don’t even think about the months. At 25% APR, a $ 1,000 advance will earn interest of about 70 cents per day. If you can pay it off in a few weeks, the interest won’t have time to accumulate. But as time goes on, the growing interest will also increase.
Your credit card statement should show you the different interest rates for your purchases, cash advances, and balance transfers. Fortunately, the Credit Cards Act of 2009 requires that credit card companies apply payments made in excess of the minimum amount due to balances with the highest interest rates. Prior to the passage of this important consumer protection legislation, it was common practice to first apply payments in excess of the minimum monthly amount to the lowest interest balances, thereby extending the time required to repay the balances. at higher interest rates.
How much does a cash advance cost?
You can use Bankrate’s credit card calculator to see the total cost of a cash advance as well as how different repayment strategies can change the amount you will need to pay.
Suppose you take a $ 500 cash advance at 25% APR and pay a minimum payment of $ 15 per month. You would pay that amount for 58 months (almost five years!) Before the balance was paid in full. You would also pay $ 362 in interest, plus a cash advance fee of $ 25 (5%) and an ATM fee, likely $ 3 or more. So, to borrow $ 500, you will end up paying an additional $ 390.
This means that the convenience of a cash advance would cost you 78% more than the original borrowed amount of $ 500 if you only made the minimum payment. Doubling your monthly payment to $ 30 per month would allow you to pay off your debt in 21 months with a total interest of $ 120 (24% more than the amount borrowed), while tripling it to $ 45 per month would only take 13 months. and you would only have to pay an additional $ 75 in interest (15% more).
This example highlights the importance of paying more than the minimum amount in order to minimize the cost of a cash advance. You can significantly reduce interest charges and your repayment schedule if you can make large payments beyond the minimum amount. If you can’t afford to pay more than the minimum, it may be best to save your money and avoid getting a cash advance.
Alternatives to a credit card cash advance
Before you turn to an expensive cash advance, consider these options to meet your needs and save money.
Request an extension
Instead of getting a cash advance to pay a bill, you may be able to ask your creditor to extend or change your due date. You might even be able to work out a payment plan to catch up with your account without affecting your credit. Many creditors even allow their customers to put their accounts on hold for an agreed number of weeks or months due to financial hardship.
It doesn’t hurt to talk to your creditors to discuss your options. You can simply gain the flexibility you need to deal with an unforeseen expense or emergency.
Friends and family
While borrowing money from a friend or family member can be a more flexible and less expensive option, this arrangement can also hurt your relationship with the person agreeing to lend you the money. If you go this route, make sure that you and the other person have clear terms before accepting money.
Unless you have good credit, a personal loan can be an expensive option with high interest rates. Still, interest rates and terms are generally much more favorable than a cash advance.
The bottom line
A cash advance should be a last resort due to its high interest, transaction fees and other factors. Consider other alternatives such as asking for an extension, getting a personal loan, or seeking help from a friend or family member.
If you have few options and your best bet is to get a cash advance, you can minimize the financial impact by withdrawing only a small amount and paying off the balance as quickly as possible.