Cash advance: Know when it’s a good option

A cash advance, also known as a credit card advance, is one of the options offered by credit cards for those who need money quickly.

However, this convenience comes at a high price, with fees and interest that can strain your finances.

If you want to learn more about cash advances, follow this article to understand if it’s really a good option!

What is a cash advance?

A cash advance is basically a loan you take directly against your credit card’s credit limit.

Instead of using the card for purchases, you withdraw a cash amount, usually from an ATM or directly at the bank.

Although this option may be tempting in emergencies, it’s essential to remember that cash advances usually come with unfavorable terms compared to regular credit card purchases.

The main difference between a cash advance and a regular credit card purchase is that a cash advance doesn’t offer an interest-free grace period.

Interest starts accruing as soon as you make the withdrawal, which can quickly increase the total amount you owe.

Understand how cash advances work on credit cards

Requesting a cash advance is relatively simple. Most credit card issuers allow you to do this at ATMs or bank branches.

You will need your credit card and your PIN (Personal Identification Number). Another way to get a cash advance is by visiting your bank’s branch and requesting a withdrawal directly at the counter.

This process is just part of what you should consider. The advance amount is deducted directly from your available credit limit, and remember, there is no grace period.

The cash advance balance is usually treated differently from regular purchase balances, with higher interest rates and a payment order that prioritizes other expenses before reducing the cash advance balance.

What are the fees for cash advances?

One of the biggest downsides of a cash advance is the associated fees.

Besides the high interest, you also pay a transaction fee for each advance, typically ranging from 3% to 5% of the amount withdrawn, with a fixed minimum.

For example, if you withdraw $500, you might have to pay a $25 fee upfront, in addition to the interest that begins to accrue from the moment you make the withdrawal.

Interest rates on cash advances tend to be significantly higher than those applied to regular credit card purchases.

While the average interest rate for credit card purchases ranges from 16% to 22%, cash advance rates can easily exceed 25%.

This means your debt can grow quickly, especially if you cannot repay it within a short period.

Is there a limit for cash advances on credit cards?

Yes, cash advances are subject to specific limits. These limits are usually lower than your total available credit limit for purchases. If your credit limit is $10,000, the cash advance limit might only be $2,000.

This amount varies by card issuer, so it’s important to check with your bank or credit card provider to find out the specific limit for your card. The cash advance reduces your available credit limit directly.

If you withdraw $500 in cash and your cash advance limit is $1,000, you will have $500 left for future advances.

This withdrawn balance also reduces the amount you have available for regular purchases if you need it.

When should you consider a cash advance?

A cash advance should be considered only as a last resort and in absolute emergency situations.

It can be helpful if you need money immediately and don’t have other credit options available, such as a personal loan or funds in your checking account.

Some examples of situations where a cash advance may be considered include medical emergencies, unexpected car repairs, or any urgent expense where there’s no time to seek cheaper alternatives.

Even in these situations, it’s crucial to carefully evaluate all alternatives before taking out a cash advance. A personal loan or even an overdraft might be less costly in terms of interest and fees.

Know what to consider before a cash advance

Before opting for a cash advance, evaluate the situation carefully. First, consider the fees and interest involved, as mentioned earlier.

If the additional costs outweigh the benefit of getting money quickly, a cash advance may not be the best choice.

Also, consider your ability to repay the debt. If you cannot quickly repay the cash advance, the high interest will accumulate rapidly, putting you in an even more challenging financial situation.

Frequent use of cash advances negatively impacts your credit score, as issuers see this practice as a sign that you are facing financial difficulties and may default on payments.

Is this type of cash advance worth it?

In many cases, a cash advance is not worth it due to the high fees and interest rates associated.

The speed with which you can get cash in hand is attractive, but the cost can be very high if the debt is not paid off quickly.

This option should only be used in real emergencies and as a short-term solution.

Pros

• Quick access to cash: You can get money immediately, especially in situations where you cannot use your credit card directly.
• Simplicity: No need for a separate credit check or a new loan application.
• Convenience: It’s possible to withdraw money from ATMs or directly at the bank.

Cons

• High fees: The transaction fee and associated interest are much higher than those for a regular credit card purchase.
• Fast accumulation of debt: Since interest starts accruing immediately, your debt can grow rapidly.
• Impact on credit limit: The cash advance reduces the available credit limit, which can limit future transactions.

Have you identified how a cash advance works, its advantages, and its disadvantages? Use these tips to make informed financial decisions.

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