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How Do Credit Card Cash Advances Work?

Quick cash from your credit card may seem great, but is it financially worth it?

May 7, 2021

Cash in hand, the moment you need it? Well, that sounds like a pretty sweet deal. But something that good must come with a catch, right? Despite the convenience of a cash advance, there are some considerable downsides that many people don’t even realize until they’re slammed with a hefty bill down the line.

In some situations, a cash advance may be the right choice, but it also might be too good to be true.

How can you spot the difference? This Tally guide is a great place to start.

What is a cash advance on a credit card?

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Just as it sounds, a cash advance is when you can withdraw cash before you have it — like borrowing from your bank. You can also think of it as purchasing money with your credit card, the way you’d buy a flat-screen TV or a sandwich.

It’s a temporary loan against your line of credit that puts bills in your pocket instead of an interest charge on your credit card.

Usually, people use cash advances when they need paper bills for a purchase but don’t have the available funds to withdraw directly from their bank account. Most credit card companies put maximum limits on cash advances, so you likely won’t be able to withdraw your entire line of credit in bills.

How does a credit card cash advance work?

In practice, how do credit card cash advances work? For the most part, getting a cash advance is a combination of a bank withdrawal and a small loan:

  • Like a bank withdrawal, you’ll be able to take money out of an ATM the same way you would if you were withdrawing funds from your checking or savings account.
  • But like a loan or any other credit card purchase, you’ll be required to pay back the money you borrowed — plus interest charges and other fees.

How to get a cash advance

The danger here is that the act of withdrawing a cash advance is quite easy — almost too easy, which is why so many people do it without thinking of the consequences.

There are three simple ways to borrow cash on your line of credit:

  • Withdraw from the ATM – Most credit cards these days are equipped with a PIN for your convenience. If your card has one, you can take it to any ATM, select the “cash advance” option, and withdraw funds directly from the machine.
  • Withdraw from a bank branch – If your card doesn’t have a PIN, you’ll have to go in person to the bank with your credit card and a photo ID. The teller might give you some paperwork to fill out before you can proceed.
  • Use a convenience check – Some credit card companies still provide users with convenience checks. Like a standard check, you can use them to make payments and purchases, but from your line of credit instead of your checking account. To secure your advance, just write yourself a check to cash in at the bank.

A cash advance is easier for some people to secure than others. In some ways, the added inconvenience is a blessing in disguise — it might prevent you from taking out a loan without even considering the credit card cash advance fees and hefty costs.

So, what is the credit card cash advance fee? And how about the interest rate?

Credit card cash advance interest rate

Securing cash when you’re in a bind is a major relief — but at what cost?

The interest rates associated with cash advances render it a less-than-ideal option. This includes:

  • Higher-than-normal interest rates – Credit card companies have different sets of terms and conditions for cash advances and regular purchases. The inflated interest rate on cash advances can rise as high as 30%.
  • No typical interest-rate promotions – Not only are you paying more interest, but it also starts adding up instantly. In most cases, the promotional benefits you usually enjoy, like delayed interest accumulation, don’t apply to cash advances.
  • No grace period before repayment – Cash advances are less forgiving than other credit card payments. The usual no-penalty grace period — 15 days or so — doesn’t apply. Unfortunately, people that need cash advances usually need that grace period the most. If they were low on funds originally, it’s more likely that they’ll also struggle to repay the loan. Now, the cash advance could cost even more.
  • Excluded from rewards programs – Cash-back, airline points and other rewards don’t usually apply to cash advances.
  • Plus, an automatic cash advance fee – In addition to the inevitable interest costs, you’ll also face a transaction fee — anywhere from 2% to 4% — just for taking out the cash advance.

Despite these clear downsides, cash advances might be necessary for emergencies. After all, they were invented to help borrowers in a bind. If you can pay your loan back quickly and fully, you won’t face the entire weight of the financial repercussions.

How to pay off a cash advance effectively

Try to follow these two simple rules when taking out and paying back cash advances:

  • As small as possible – You should consider borrowing the lowest amount you can get while still meeting your needs. Even a $100 cash advance repaid on the very same day could cost you $10 to $15 — that’s 10% to 15% without even accruing interest.
  • As fast as possible – Interest fees stack up quickly, especially with such a high APR. A few days won’t cost you too much, but several weeks, and especially months, can do a number on your finances.

Positives and negatives of cash advances

If cash advances were all bad, no one would use them. However, it’s important to weigh the pros and cons when deciding on the matter:

PROS: why you’d want a cash advance

  • Highly convenient in an emergency
  • Accessible at all times if you have a PIN card, even during non-business hours
  • Instant approval — no new line of credit or paperwork required, in most cases 

CONS: why you should avoid a cash advance

  • Very expensive, especially if you can’t pay it off quickly
  • Less generous terms than your regular credit card purchases, including no grace period, immediate interest accumulation, higher interest rates and serious transaction fees

In a pinch — maybe your car broke down, and the mechanic only accepts bills — a cash advance will serve you well. Otherwise, there are other more sustainable options that still put the cash you need in your wallet.

Alternatives to a credit card cash advance

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Cash advances are a quick fix with lasting impact. There are other ways to secure the cash you need, but they may or may not suit you better than a cash advance, depending on your current financial situation and creditworthiness:

  • A loan from family or friends – In emergencies, you may be able to call on your community for a free or low-interest short-term loan. To mitigate the awkwardness of borrowing from friends or family, consider writing up official terms and a repayment timeline.
  • 401(k) loan – If you have a 401(k), you can usually borrow from yourself with no credit check and a generous lending credit limit. You won’t be earning returns on your investments during that time, so you still won’t want to wait too long to repay it.
  • Roth IRA withdrawal – In an emergency, you can withdraw from your retirement fund with zero penalty or tax payments.
  • A personal loan from a bank – With a solid credit score, you can secure a suitable personal loan that will hopefully have more favorable terms and less overall incurred interest.
  • Collateral loan – Borrowing against assets such as your home equity or a trust can earn you less harsh terms than unsecured loans like credit cards.
  • Salary advance – Similar to a cash advance but from your company instead of the credit card company, your employer may offer salary advance options. But beware of predatory interest rates that may far surpass what you’ll incur on a cash advance.
  • Peer-to-peer loan – Peer-to-peer (or P2P) lending is a more direct way of borrowing money — your lender is an individual investor, not a bank. You’ll likely notice more relaxed credit requirements, though the interest rates might still be similar to cash advances.

There are also payday or title loans, though these last-resort options have incredibly high-interest rates and fees, much more so than even the most expensive cash advances.

Pay off debt — including cash advances — with Tally

The damage may be done, but the debt doesn’t have to follow you around forever. Tally helps you pay off your debt, whether from an emergency cash advance or several separate lines of credit, by providing late fee protection,* lower interest rates and a plan of action that turns massive numbers into manageable figures.

Sign up with Tally to start saving.

 

*To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.9% – 25.9% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.

With a Tally line of credit, late fee protection is available on linked credit cards for users who are current on their account, in good standing, and have provided accurate credit card and bank account information.