When people are in need of cash, they don’t always stop to think through the best means for acquiring it. Generally, the cash is to pay for something they want or need. Often, however, they can get that something by buying it with their credit card, even if they can’t pay for it outright and will have to pay off the balance on the card in installments. So which method of acquisition is better for you? Should you pay with borrowed cash or on credit?

What Is a Cash Advance on a Credit Card?

A cash advance is a way of obtaining immediate funds through your credit card. It is not unlike a payday loan, only the funds are being advanced not against your paycheck but against your card’s line of credit. In a sense, a cash advance acts like any other purchase being made through your credit card, but instead of buying goods or services, you are buying cash.

What many people don't understand about cash advances is that your credit card handles them differently from the way it handles credit it extends for you to buy products or services with your card. Among other things, the interest rate may be higher and there may be a transaction fee. On the other hand, an advance may make sense compared to other ways of getting a quick loan. It's always worth checking it out but don't make a move until you know the full costs.

How to Get a Cash Advance from a Credit Card

Cardholders obtain a cash advance by visiting an ATM, bank, or other financial institution or by requesting a check from the credit card company. In fact, some card issuers periodically send checks in the mail as a way to entice consumers into getting a cash advance.

If the card company invites you to take a cash advance, what could be wrong? You probably already know the overall answer to that question. But the devil is in the details, and you need to fully understand what you're getting into before you exercise your cash advance option. 

Credit Card Cash Advances Have Different Repayment Terms from Regular Purchases

Credit card companies like cash advances in part because they treat the interest on them differently than interest on card purchases. The interest rate is often higher on a cash advance by several percentage points, ranging from 15% to 30%. Also, any special interest-rate promotions on the card – such as no interest until a certain date – may not be applicable on cash advances, meaning you could get dinged unexpectedly.

Besides charging a higher-than-normal interest rate, credit card companies also automatically charge a transaction fee of 2% to 4% on the advanced sum. Also, interest on cash advances usually starts accruing from the very day that you withdraw the money. There is no grace period, as there is with regular purchases. What’s more, cash advances do not typically qualify for rewards, cash back or other credit card benefits. Your cash advance line is almost always considered to be separate from the rest of your credit balance.

You can learn the details for your particular card from its website or the documents you were given when you signed on. If it's a special offer, that's the part you should check.

How Your Payments Are Applied

Another consideration is that credit card issuers have the right to put any payments toward lower-interest purchases first and higher-interest purchases last. This means that the entire balance on your regular card purchases must be paid off before your payments even begin going toward the cash advance.

For example, say you have a $5,000 balance on a card with a special annual percentage rate of 10% that you plan to take 15 months to pay off, and while you are doing so you take out a $500 cash advance that generates 22.5% in interest. Your monthly payments will be applied only to the $5,000 balance until it is paid off. Meanwhile, you will still be charged that 22.5% on the $500 cash advance for the entire 15-month period. The only way to avoid it is to pay off the other $5,000 quicker than you planned. Only then will your minimum monthly payments go toward paying off the cash advance and its higher interest charges.

Better to Simply Use the Credit Card Itself

Instead of taking a cash advance, try to use the credit card itself for anything that you can. If there is something that has to be paid for and you absolutely cannot use a credit card to do so, take as small a cash advance as possible to reduce interest charges and be sure to pay off your balance as quickly as you can.

The Bottom Line

Like balance transfers, cash advances can be a good resource in certain circumstances. However, it is important for consumers to understand the terms of the agreement, including interest rates and one-time fees, before proceeding with these transactions. Your high-interest cash advance loan could stick around for a very long time if you do not manage it appropriately.