When you need money fast, your first thought might be to turn to a credit card cash advance. It's quick, it's easy, and often your credit card issuer seems to be begging you to borrow by sending you offers and blank checks. Still, cash advances carry many costs and limitations, so before going this route, be sure you investigate alternative financing—such as the methods listed below. First, though, let's examine the terms of a credit card cash advance, so you can better compare it to other options.
- A credit card cash advance is a loan from your credit card issuer.
- Advances generally do not come with an interest-free grace period, have a higher interest rate than regular purchases, and carry a transaction fee.
- The amount of the advance is usually limited to a percentage of your credit limit.
- Alternatives include various types of loans—from family or friends or your 401(k), or collateral or personal loan from a bank, for instance—or a salary advance.
How a Credit Card Cash Advance Works
A credit card cash advance is a cash loan from your credit card issuer. As with any purchase, the cash advance will appear as a transaction on your monthly card statement, and interest will accrue until it is paid off.
Significantly, though, the terms for cash advances are different from those of everyday purchases—and not in your favor. There is usually no grace period for cash advances; the interest starts accumulating from the transaction day. Also, the interest rate is usually somewhat higher for cash advances than for everyday purchases.
Credit Card Cash Advance Terms
Details about cash advance fees and terms can be found on the Schumer box for the credit card, which should appear on your card statement or in the original credit card agreement. Here’s an example from the Chase Sapphire Preferred card. It shows that the annual percentage rate (APR) for a cash advance is 24.99%, compared to 15.99% for purchases (depending on credit). The fee is $10 or 5% of the advance, whichever is greater.
Another important detail: When a credit card has different balances, payments are applied in the manner disclosed by the credit card issuer, not necessarily to the balance the cardholder wants to pay off first. For Military Star Rewards account holders, Chase applies the minimum payment to the balance with the highest APR. Any payment above the minimum is applied "in any way we choose."
These terms mean that even if you make payments regularly and diligently, it can be hard to pay off the advance, especially if you're continuing to use the card to make purchases. Getting sucked into an ever-increasing debt spiral is very easy.
Cash advances are sometimes limited to a percentage of the cardholder's credit limit. Each credit card issuer has its policy and formula for setting cash advance limits. In this example, the cash limit is 20% of the credit limit:
Your credit card company gets to decide what part of your balance it applies any payment to that's over the monthly minimum amount, allowing it to shrink low-interest balances before high-interest ones.
8 Alternatives to a Credit Card Advance
Because of the higher cost of a cash advance, it's worth investigating other income sources. Depending on your creditworthiness and assets, these eight options may be better than or not as good as a cash advance. Each has advantages and disadvantages.
1. Loan From Friends or Family
Consider asking folks close to you for a free or low-interest short-term loan. Yes, asking can be embarrassing, and the loan could come with a lot of emotional strings. It will help if you keep things businesslike: Use a properly executed written agreement that spells out all of the terms, so both sides know exactly what to expect concerning cost and repayment.
2. 401(k) Loan
Most 401(k) administrators allow participants to borrow funds from themselves. Interest rates and fees vary by employer and plan administrator but are generally competitive with prevailing personal loan rates (see below). The loan limit is 50% of the funds up to a maximum of $50,000, and repayment is five years or less. There is no credit check, and payments can be set up as automatic deductions from the borrower's paychecks. Keep in mind that while you're borrowing funds from your 401(k), they are not earning any investment returns, which could affect your retirement.
COVID-19 Pandemic Exception to 401(k) Loans and Early Withdrawals
There was an exception made to this loan limit in 2020 under that year's Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 in response to the COVID-19 pandemic. Under the CARES Act, 401(k) between March 27 and Sept. 22, 2020, borrowers could take out 100% of their 401(k) account, up to $100,000.
Besides, Congress allowed 401(k) holders to take up to $100,000 in distributions without a hit from the 10% percent early withdrawal penalty for those younger than 59.5 years old. If you took distributions early in 2020, you did have to pay income tax on the withdrawal. But the IRS allowed for a three-year period of repayment. Meaning you can pay those taxes stretched out over time, or you can repay the distribution as a rollover contribution.
3. Roth IRA
While it's not highly recommended because the funds are supposed to be for retirement, there is a way to use your Roth IRA as an emergency fund. Because contributions to a Roth IRA are made with after-tax dollars, Internal Revenue Service (IRS) rules allow you to withdraw that money at any time without penalty and without paying additional tax. If you're under the age of 59½, though, be sure not to withdraw more than you've contributed, even if the account has grown in size. The earnings on your contributions are subject to taxes and penalties.
4. Bank Personal Loan
For a borrower with good or excellent credit, a personal loan from a bank may be cheaper than a credit card cash advance. Also, the payoff will be faster than making credit card minimum payments, further reducing the amount of overall interest paid.
In the case of a financial emergency, you may need to borrow money in a hurry. Finding the best loan may seem particularly daunting in an urgent situation. However, even if you face the additional hurdle of bad credit, you may still have access to emergency loan options.
5. Collateral Loan
Any loan secured by real assets is a collateral loan, which often has less-stringent credit requirements than an unsecured loan. Home equity loans and lines of credit are secured by your residence's value, for example. Some banks also make loans against the value of a trust or certificate of deposit (CD).
6. Salary Advance
Many employers offer low-cost payroll advances as an alternative to more costly traditional payday loans. Fees can be as low as $8, but beware of interest rates. They range from 10% to 165%, which is predatory lender territory. Payments can be set up as automatic paycheck deductions.
7. Peer-to-Peer Loan
P2P lending, as it has come to be known, is a system in which individuals borrow money from investors, not banks. Credit requirements are less stringent, and approval rates are higher. The most expensive loans top out at about 30% APR, plus a 5% loan fee.
8. Payday or Title Loan
A car title loan should be considered as a last resort due to its astronomical cost. Like title loans, payday loans usually charge interest rates well in the triple digits—300% to 500% and more. The fees on both types of loans can be so unaffordable for borrowers strapped for cash that many renew their loans several times, at an ultimate cost of several times the original loan amount. These two are probably the only loans that the credit card cash advance is superior to—except in states where the interest rates on this sort of financing are capped very stringently.
The Bottom Line
Every short-term loan option has its pros and cons. A cash-flow crunch is a high-stress situation, but that doesn’t mean you should panic. Take time to consider all your options. The terms for short-term loans are often strict, financially as well as emotionally. However, depending on your exact needs and timetable, another sort of financing may be preferable to borrowing from your credit card. Credit card cash advances are costly enough that they should only be considered in a genuine emergency.