A credit card cash advance is a cash loan from your credit card issuer. Like a credit card purchase, the cash advance will appear as a transaction on your statement and interest will accrue until it is paid off. There is usually no grace period for cash advances; interest accrues from the day of the transaction. Also, the interest rate is usually somewhat higher for cash advances than for everyday purchases.
Before choosing to take a cash advance,be sure you fully understand its cost and limitations – and have investigated alternatives.
Cash Advance Costs and Limitations
Details about cash advance fees and terms can be found on the Schumer box for the credit card. Here's an example from the Chase Sapphire Preferred (November 3, 2014). It shows that the APR for a cash advance is 19.24%, compared to 15.99% for purchases. The fee is $10 or 5 percent, whichever is greater.
Another important detail: When a credit card has different types of 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 Sapphire account holders, for example, Chase applies the minimum payment to the balance with the highest APR. Any payment above the minimum is applied "in any way we choose."
Cash advances are sometimes limited to a percentage of the cardholder's credit limit. Each credit card issuer has its own policy and formula for setting cash advance limits. In this example, the cash limit is 20% of the credit limit:
8 Alternatives to a Cash Advance
Because of the higher cost of a cash advance, it's worth investigating other income sources. Depending on your creditworthiness and assets, these options may be better or less good than a cash advance. Each has advantages and disadvantages.
1. Loan from friends or family. For some borrowers, the hardest thing about needing help is asking for it. Consider asking family or friends for a free or low-interest short-term loan. Use a properly executed written agreement that spells out all of the terms so both sides know exactly what to expect with regard to cost and repayment.
2. 401(k) loan. At least 87% of 401(k) administrators allow participants to borrow funds from themselves. Interest rates and fees vary by employer, but are generally competitive. 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. See Sometimes It Pays To Borrow From Your 401(k).
3. Roth IRA. You can use this form of a retirement savings as as a source of quick cash. See How To Use Your Roth IRA As An Emergency Fund. Again, there are limitations on what you can borrow and when you might incur penalties.
4. Personal loan from bank. For a borrower with good or great credit, a personal loan from a bank may be cheaper than a credit card cash advance. Also, the payoff will be faster compared to making credit card minimum payments, further reducing the amount of overall interest paid.
5. Collateral loan. Any loan secured by real assets is a collateral loan and may have less stringent credit requirements than an unsecured loan. Home equity loans and lines of credit are secured by the home's value. Some banks also make personal loans against the value of a trust or certificate of deposit.
6. Salary advance from employer. Many employers offer low-cost payroll advances as an alternative to more costly traditional payday loans. Fees are as low as $8.00, 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, except in states where title loan interest rates are capped very low. 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. See Beware Of Payday Loans and Getting A Car Title Loan
The Bottom Line
Credit card cash advances are costly enough that they should only be considered a viable option in a true emergency. The potential for falling into a cycle of debt is quite real. The wisest course of action is to explore all of the alternatives in order to determine what types of financing you qualify for –and at what cost – before making a final short-term borrowing decision. See How A Cash Advance Works and The 4 Worst Reasons For A Cash Advance.