Cash advances allow credit card customers to obtain immediate funds. They are not unlike payday loans, 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.

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.

Why do they care? Because most credit card companies treat interest on cash advances differently than interest on purchases made with the card. For starters, the interest rate is often higher on a cash advance by several percentage points, ranging from 15%-30%. Also, any special interest-rate promotions, such as no interest until a certain date, may not be applicable on cash advances – so you may get dinged unexpectedly.

Besides charging a higher-than-normal interest rate, credit card companies also automatically charge a transaction fee of 2%-4% on the advanced sum. Plus, interest on cash advances usually starts accruing from the very day that you withdraw the money, because there is not a grace period on this type of transaction, as there is with regular purchases. Cash advances do not typically qualify for rewards, cash back or other credit card benefits, either. Your cash advance line is almost always considered to be separate from the rest of your credit balance.

Another consideration is that credit card issuers have the right to put any payments towards lower interest purchases first and higher interest purchases last, including cash advances. This means that the entire balance on regular card purchases must be paid off before your payments even begin going toward the cash advance. So, if you have a $5,000 balance on a card with a special APR of 10% for 15 months and you take out a $500 cash advance that generates 22.5% in interest, which one your monthly payments will be applied to? You guessed it: the $5,000 balance. And you will still be charged that 22.5%  on the $500 cash advance for the entire 15-month period unless you pay the other $5,000 off before that date.

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 and you absolutely cannot use a credit card to pay it, take out as little as possible to avoid interest on a higher amount, and be sure to try to pay your balance off as quickly as possible.

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.

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