Have you ever been caught in a tough spot where you needed some urgent cash? What do you do? You may ask a family member or friend who to lend a hand. But, that may not work out so well because it’s dependent on their generosity and you’re not sure if they’ll lend you the cash. As the options dwindle, you start considering cash advance loans or short-term loans.
The quickest short-term loan which is often available in your wallet is a cash advance from your credit card.
Of course, you’ve heard so much about why you shouldn’t tread in these waters, but when your options are few and you’re desperate for a quick $1,000 to pay off the rent or settle another urgent matter, caution usually takes a back seat.
Before you take the step, it’s only fair that you get more information about cash advance credit card. What it is; what are the costs; how the provider will apply your payments; repayment grace period and what alternatives could you still explore.
Here’s what everybody ought to know about credit card cash advance
What is a Credit Card Cash Advance?
Credit card service providers are conscious of the fact that there are times when you need hard cash, not just a shopping or payment service. When you scrutinize the terms and conditions of your credit card, you will notice that along with your credit limit, there’s a smaller limit, often a couple of hundreds of dollars or in some cases a few thousand dollars. This limit is your cash advance limit and it exists to give you the flexibility of accessing cash advance from your credit card.
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A credit card cash advance is a loan from your credit card issuer that appears like a credit card purchase on your statement and it attracts interest and fees.
Most credit card issuers have made the process really easy. They cut-off lengthy loan processing and make cash advance credit card easily available. Like a debit card, you can easily withdraw money from the ATM using the PIN of your credit card. However, the cash comes from your credit card limit, not the checking or savings account. Some credit card issuers send reminders (some would say enticers) of this facility by issuing you with a convenience check which you can use to draw cash against your credit card limit.
How does it Work?
A cash advance credit card offers a fast and convenient way of obtaining immediate cash through your credit card. Unlike the debit card withdrawal which comes of your checking account or savings account, if you draw the funds from the ATM using your credit card, the money comes off your credit card limit.
Like a credit card payment, it attracts interest and a myriad of other fees in addition to the applicable interest.
It also works differently from other short-term loans such as payday loans or title loans on the following grounds:
The amount is pre-approved (the amount available for you is factored in your credit card limit) and you don’t have to apply and make justifications of your need and there’s no collateral. And the amount comes straight from your credit card limit. Therefore, all other credit card terms apply in addition to the advance cash terms.
A credit card cash advance is amazingly flexible and easy to get! The convenience beats risking jeopardizing relationships, making endless applications and waiting for bureaucratic approvals when all you need is cash now!
However, you have to remember it’s a short-term loan, and short-term loans can be expensive.
Here’s a look at costs associated with the credit card cash advance.
What are the Costs?
Many people make the wrong assumption that cash advance credit card attracts the same interest rate and fees as would a regular credit card purchase. They assume that the issuer treats a cash advance the same way they would an ordinary credit card transaction. However, that’s not the case. The interest rate is often higher, and it attracts other transaction fees in addition to the normal card fees. Therefore, it’s always advisable to know the full costs before you make the move.
• You’ll pay a higher APR
Unlike an ordinary credit card transaction, the APR for a credit card cash advance is typically much higher. This means that you’ll be charged a lot more for using that cash. For instance, the APR for a cash advance could be set at 19.30%, while the APR for purchases set at 15.99%.
Also, unlike the regular credit card transaction which has an interest free period, with cash advance credit card, interest begins to charge immediately. There’s no interest-free period. If you carry the cash advance balance rather than paying it off immediately, the interest could accumulate real fast.
• You’ll Pay Extra Fees (Cash Advance Fee)
In addition to the regular card usage fees, you’ll also incur an extra credit card cash advance fee when you access this type of short-term loan. Many card issuers peg the cash advance fees at 5 percent or $ 10–whichever is higher–and they charge this amount upfront. Meaning, if you take a $ 150 credit card cash advance loan, you’ll receive $ 140. If you take a higher amount, say $ 500, the applicable fee will be $ 25, therefore you get $ 475 after deducting the cash advance fees.
Most card issuers charge this fee up front. However, there are few who charge it when the balance is due. You can attempt to minimize the applicable interest by paying off the balance as soon as possible but you can’t get away from paying this fee.
How Credit Card Issuers Apply Your Payments
Here’s another consideration you should have in mind before you take out a cash advance credit card. Credit card issuers typically knock off the low-interest transactions before touching the high-interest transactions. It’s a neat trick used to charge you the higher interest for a longer period.
For instance, when you get a credit card cash advance on Monday 1st, of say $ 500, and you use the card to make purchases on Wednesday 3rd of about $ 800; the card issuer will knock off the lower interest payment ($ 800) before clearing the cash advance ($500) when you pay off your balances at the end of the month.
This is how it translates to your entire credit card balance: If your credit card balance is about $ 6,000 and you intend to clear it in the next 12 months, any payments you make will go towards repaying the card balance. However, the cash advance of $ 500 will remain outstanding for the entire 12 months period. You’ll end up incurring higher interest cost for longer.
Therefore, when you get a credit card cash advance, it is prudent to pay off your entire credit card balance within the shortest time possible.
There’re no Interest-free Periods
To make matters worse, credit card cash advances don’t have interest-free or grace periods. If you thought you are card savvy and have mastered your card issuer’s billing and statement cycle, you’d better watch out lest you trip yourself in endless payments.
If you take a credit card cash advance, interest starts accruing from the moment the ATM dispenses your cash. And by the time you receive your statement, the loan has already accrued interest. There’s just no way to circumvent it.
When a Credit Card Cash Advance Doesn’t Come as Cash
Another scenario “card savvy people” should look out for are transactions which are treated as a cash advance despite not actually availing cash from your credit card. A typical case happens when you set up your credit card for overdraft protection, or when you make wire transfers, or purchase cryptocurrency using your credit card. The amounts therein are treated as a cash advance from your credit card.
Smart Alternatives to Credit card cash advance
Cash advance credit card is convenient and extremely tempting. But, it can also be your one-way ticket to a financial spiral. If you are in a tight spot and own a business, check out LendingClub and get to know what options are available to you.
Alternatively, you can go shopping with a friend. Friends may not be willing to advance you the cash without a surety; however, he or she may be more willing to give you the cash in exchange for you paying for their shopping. This article gives you amazing ideas on how you can make cash real fast apart from your regular income
You can also check out the alternatives of a personal loan from your bank or credit union, or borrow against your retirement nest egg. If you are employed, you can consider a payday loan or a title loan. However, these are also short-term loans which have characteristics of predatory lending.
Here’s the Bottom Line
Most people consider a credit card cash advance as a last resort. However, its convenience and accessibility could cause you to compromise and access the loan more frequently than you thought. For instance, if you left your debit card at home and you need cash urgently, you may get tempted to use the credit card cash advance. The above reasons will help you to think twice. And if it’s not an important emergency, it’s not worth taking the cash advance credit card.