Cash advances are withdrawals arranged with your credit card company that allow you to take out sums of money in times of need. Things happen, and sometimes you need to get access to a fistful of cash in a moment’s notice.
It seems like a great, convenient idea, right? In some cases, yes. The risks are high, though, and you should be totally informed about them before you consider getting a cash advance from your credit card.
We’re going to go over some of the specifics of cash advances, things to look out for, and whether or not you should get one. Let’s get started:
What are Cash Advances?
Credit cards, if you didn’t know, don’t operate in the same way as debit cards do. When a debit card is connected to your bank account, you can simply take out cash whenever you like, only getting hit for the ATM or bank fees you might be subject to.
When you’re withdrawing from a credit card account, though, you are technically taking out a cash advance. You can think of these in a slightly different light from your normal withdrawal.
Cash advances are similar to loans, subject to fees and interest rates in the same way. When you take out a cash advance, it’s almost as if you are buying the convenience of cash.
You may need to take out cash in instances where you can’t make a purchase otherwise. Of course, there’s the occasional food truck, cash bar, or old-style business that doesn’t accept anything but cash. Those are situations where a cash withdrawal can be extremely tempting.
At the same time, those are non-essential products. Biting into a greasy burger is nice, but it tastes a little worse when you realize that you have to pay interest on the cash you took out to buy it.
If you’ve set up a pin for your card, you can take out cash advances from ATMs. Otherwise, you can stop into your bank or bank-affiliated location and take out an advance.
What are the Fees Associated With Advances?
There are a few primary fees associated with cash advances. The amounts of each will vary based on how much cash you take out.
The first fee will be an initial charge for the service of getting a cash advance. It’s essentially the charge that you get for having the option of taking out a cash advance and using it.
Sometimes, these fees are a flat rate no matter how much you take out. So, it could be a 5 dollar fee for taking out 1,000 dollars all the way down to 20 dollars. This is ideal in situations when you’re taking out large sums of money, but unfortunate for smaller amounts.
You could also be charged a percentage of the amount you withdrew. Finally, you might be charged a percentage to a point, until that percentage reaches, say, 5 dollars, which would be the most you could be charged. In other words, you won’t be charged more than a certain amount, but smaller amounts would warrant a certain percentage.
Second, you’ll also be required to pay the fees of the bank or ATM that you’re taking out money from. These come with the territory and shouldn’t be a surprise.
The final fee is interest. While you have an interest rate for your normal purchase on a credit card, the interest on cash advances is going to be different from your normal purchases.
Interest on cash advances is going to be higher than your typical purchases, and the repayment won’t operate in the same manner as your other credit card transactions. It’s difficult to say what your interest rate will be without speaking with your bank, but you can be confident that it’ll be much higher than your average rate.
Additionally, most credit card transactions have a grace period from the time the purchase was made to when the interest starts accruing. Cash advances tend to pick up interest immediately after they happen. That means that you rack up interest until it’s paid back.
With that in mind, getting that greasy burger starts to sound a little less enticing.
Things to Consider
Cash advances are a tricky thing to think about. On the one hand, if you don’t have the cash in your bank account to make a withdrawal, you’re probably in a difficult financial situation.
On the other, difficult financial situations make a quick thousand dollars in cash seem extremely nice. Additionally, a “cash advance” sounds pretty timid, it sounds like borrowing a few hundred dollars from a friend or family member to cover your month’s rent.
It’s important to think of cash advances for what they really are: loans. Advances are pretty much the same thing as a loan, except there is no grace period between the time of withdrawal and the time interest begins to build up. It’s similar to the idea of a payday loan.
Payday loans are ones which are available to almost anyone, are extremely fast ways to get your hands on some cash, and have extremely high-interest rates. In large part, payday loans are ways for lenders to rake in profit on interest payments and late fees.
Credit card companies are a little less insidious, and cash advances are trustworthy because they come from a company you know and trust. At the same time, rates are set in stone and late fees are a very real way to get into debt.
Situations Cash Advances Should be Used
With all of the above in mind, you shouldn’t treat cash advances lightly. These aren’t things to use freely, whenever you need a good deal of cash. Credit cards are already a dangerous thing to carry around in your pocket if you aren’t careful, but the reality gets a lot costlier when you take out cash advances.
At the same time, there are some very good reasons to take out cash advances. In times of emergency, for example, you may need to get a large amount of cash at a moment’s notice.
Whether you’re facing eviction, a friend is in trouble, you have unexpected medical costs, or something else, some situations just require cash. Additionally, some situations don’t allow you to use a credit card for whatever reason.
These are times when you need to get cash. They are situations where the reality of interest payments and fees is well understood, and the cost of not getting cash is much higher than the price of the interest on the loan.
It’s essential that you understand these things and think them through before you make that trip to the ATM or bank. In other words, a trip to the bar or vacation are not good reasons to take out a cash advance.
You probably wouldn’t take out a loan to go on a vacation, and you certainly wouldn’t take out a loan to eat a burger that can only be purchased with cash. You would, however, take out a loan to save your life or keep a roof over your head.
Preparation for Repayment
Another thing that can ease your mind about cash advances is a plan for repayment. If you know full well that your next paycheck or two will be able to cover all of the expenses of an advance without sending you into crippling debt, covering the rest of that vacation with an advance seems a little less risky.
If you have the means to repay the credit card company within a week or two you can feel a lot more comfortable about taking out sums of money. If you’re in a situation where a cash advance is needed, make sure you understand the specifics of what you’re getting into.
First, write out the costs and expenses associated with the advance. Make sure you understand the principle value, the interest, and the fees that you’ll be faced with. Further, write these down and sketch out the value of your payments over time and pair it with the amount of money that you’ll be able to pay over time.
This way, you can have a visual representation of what you’re up against. You might find that it’s not worth the trouble once you see it down on paper. An interest rate doesn’t seem too huge until you start to flesh out the actual value you’re going to pay.
Varying Amounts of Advances
Another thing to consider is the fact that you don’t have to take out more money than you need. Depending on the credit card company you work with, you should be able to take out a specific amount of money, not exceeding the value that you actually need.
It’s easy to round up and have a little spare cash to spend in times where you’re extremely broke. Don’t do this! It will only make you more broke in the long run.
Try and take out only what you need if you have the option to. This seems obvious, but once you make the decision to get an advance it can be really easy to cave and take out a lot more than you need.
Other Options for Quick Money
Instead of getting a cash advance, you can explore some of the other options available to you.
While a lot of the options for fast cash involve some kind of interest or fees, many of them don’t even come close to the money you’ll lose by doing a cash advance. Let’s cover a few of your options:
Overdrafting Your Account
We often close our minds off to the idea of overdrafting an account. Sure, you can borrow money from the credit card company, but you might not want to spend more money than you have in the bank.
Rethink this! Overdrafting will certainly throw a fee at you, but that fee won’t be nearly as much as the overall interest you’ll pay from a cash advance. Find out what your bank’s consequences for overdrafting are and see if you would be better off just facing your bank’s charges.
This is suggested if you need a small amount of money that you’ll be able to offset with your next paycheck or two. It’s never a good move to have more money than you can pay in overdraft fees on your bank account.
Take Out a Loan
Taking out a personal loan is an option for you if you have the credit to do it. Even if you don’t have great credit, you should still be able to take out a personal loan with relatively high-interest rates.
On the other hand, your interest rates won’t be anywhere near the ones placed onto your cash advance! Of course, weigh the pros and cons and see which option would be more financially secure, but it’s likely that taking out a loan would save you money.
Additionally, a personal loan typically has a grace period before interest and payments start to kick in. This is in contrast to an advance which starts picking up fees immediately.
Borrow Money from Someone
This one can be kind of difficult to do, depending on your relationships to the ones you love. Asking friends and family for money is probably the safest way to get money in a pinch.
You can get specific amounts of money, don’t have to deal with interest payments or fees, and you can get the money immediately. At the same time, borrowing money from people is a dangerous game.
You want to be sure that you can pay them back when you say you can. You wouldn’t want to ruin a relationship with someone over a handful of cash.
Need a Loan?
There’s a lot to consider before you make the financial decision of taking out a loan or cash advances of any kind. If you’re in a pinch, sometimes you just have to bite the bullet make the tough decisions.
You’re not without help, though. Explore our site for more tips and insight on borrowing money for whatever reason.