So you’re in a tight spot. You need some cash — and quick — but your bank account is running on empty.
Then you see your credit card gleaming from within your wallet.
While you could use your credit card at an ATM to get a “cash advance,” we wouldn’t recommend it. Here’s everything you need to know about cash advances, followed by five superior alternatives.
What is a cash advance?
Cash advances are short-term loans with high interest rates and fees. The two most common types of cash advances come from credit card issuers and payday lenders.
With a payday loan, no credit check is required, and you’re supposed to pay it back with your next paycheck. Because payday loans have insanely high interest rates — sometimes as high as 400% — they are often considered the worst way to borrow money.
Credit card cash advances — which we’ll focus on in this article — are only slightly better. You borrow from your available credit limit, either by withdrawing money from an ATM or cashing a paper “convenience check.”
As Lauren Zangardi Haynes, a certified financial planner with Spark Financial Advisors, explains: “Credit card cash advances can give you access to cash in a pinch, but they are typically laden with high fees and sometimes accrue interest at a higher rate.”
How does a cash advance work?
Wondering what actually happens when you use your credit card at an ATM?
Here are five frequently asked questions about cash advances.
What’s the difference between using a debit card and a credit card at the ATM?
When you use a debit card, you are withdrawing your own money from your checking account. If you use your bank’s ATM (or if your bank has no fees), there won’t be any charges.
When you use your credit card, however, you are taking a mini loan from your credit card issuer, and will therefore pay fees and interest.
Is getting a credit card cash advance different than making a credit card purchase at a store?
Yes. Although in both cases you’re borrowing money against your credit limit, card issuers categorize cash advances differently than regular purchases. For cash advances, issuers charge special fees and higher interest, and do not offer a “grace period” — which means you’ll start accruing interest as soon as you withdraw the money.
How much cash can you get with a cash advance?
Most credit cards have a “cash advance limit” that’s lower than your credit limit. It can vary from a few hundred dollars to several thousand, depending on your line of credit. You can determine your cash advance limit by calling your issuer or checking the top of your statement.
Do cash advances hurt my credit?
Since cash advances increase your credit utilization ratio (the amount of available credit you’re using), they can cause a dip in your credit scores. Frequently taking cash advances can also signal to creditors that you’re struggling to pay your bills — and thus you’re a riskier borrower.
Are there any other types of credit card cash advances?
Yep. Your credit card issuer may code certain non-ATM transactions as cash advances, including money orders, wire transfers, and gambling and cryptocurrency purchases.
How much do cash advances cost?
Here’s what you’ll pay to take out a cash advance — and how much it could cost you over time.
- Cash advance fees: Typically 5% of the transaction or $10, whichever is greater.
- ATM fees: If you use an out-of-network ATM, you’ll pay an average of $4.72.
- Interest charges: When you take out a cash advance, you’ll begin accruing interest immediately. Many credit cards charge higher interest rates for cash advances; the average is nearly 24%.
As an example, let’s imagine you’re $500 short on rent this month. You don’t get paid until next week, and really can’t be late again, so you decide to withdraw money from the ATM using your credit card.
Off the bat, you’ll pay a $25 cash advance fee (5% of $500) and a $5 ATM fee, for a total of $30. You’ll also start accruing interest at 23.99%. So, if you don’t pay your bill until your statement arrives, you’ll owe almost $10 in interest.
When Matt Woodley, founder of Mover Focus, and his partner were traveling in Buenos Aires, he withdrew money from an ATM using his credit card. When he returned home, he was in for a nasty surprise: In addition to a cash advance fee, he’d already accrued interest at a rate that was 10% higher than normal.
“I was shocked to discover the associated fees when we returned from our holiday,” he says.
“We were misguidedly under the impression that a cash advance would be no different than using a credit card for a purchase, and we certainly learned our lesson.”
Why cash advances are worse if you have a credit card balance
Although cash advances are never ideal, they get downright dangerous when you’re already struggling with credit card debt.
Say you owe $1,000 on your credit card from the last time your car broke down. Since it was a purchase, your card is charging an interest rate of 15%. You’re trying to slowly eliminate your balance by making the minimum payments each month.
Then, you face another emergency, and decide to take out a $500 cash advance. For this, your card charges a 23.99% interest rate. While you continue to make the minimum payments, your cash advance balance never goes down.
That’s because almost all credit card issuers apply minimum payments to the balance with the lowest interest rate (in this case, your previous $1,000 balance). If you never pay more than the minimum, that $500 cash advance would take years to pay off — and would cost hundreds of dollars in interest.
5 alternatives to cash advances
The next time you’re in a bind, here are five alternatives to cash advances.
1. Get a fee-free overdraft
What do overdrafting, cash advances, and payday loans have in common? They all come with a boatload of fees.
That’s why we recommend switching to a fee-free bank like Chime. Eligible members can use the SpotMe program to overdraw their checking account by up to $100 — with no fees.
Whether you need a tank of gas or a cart of groceries, we’ve got your back.
2. Ask for an advance on your paycheck
Need some cash to help you survive until next week?
Logan Allec, a certified public accountant and owner of Money Done Right, suggests asking your employer for help. It “may be able to provide a paycheck advance,” he says.
“Reach out to human resources or your supervisor to learn more about your company’s policies,” says Allec.
Or, if you set up direct deposit through Chime, you won’t even need to bug HR. We offer our members the ability to get paid two days early — at no cost to you or your employer.
3. Use a credit card
While we normally wouldn’t advocate spending money on a credit card unless you can pay it off immediately, credit card purchases do have two major advantages over cash advances.
- They don’t start accruing interest until the end of your grace period, so if you pay your statement balance in full, you’ll avoid interest charges completely.
- Regular credit card purchases have lower fees and interest rates than cash advances.
So if you’re in an emergency situation, it’s better to pay a bill with a credit card than with a cash advance. (You can even pay your rent through a service like Plastiq, which comes with a 2.5% fee.)
Alternatively, if you know you have a big purchase coming up, you can look for a credit card with a 0% introductory APR. The promotional period usually lasts between six and 24 months, and as long as you pay off the balance before it’s over, you won’t owe any interest.
4. Pay the late fee
Are you getting a cash advance because you’re scrambling to make rent? Before committing, you might want to calculate how much a late payment would actually cost you.
Most landlords offer a grace period of five days before they start charging late fees, and even then, they may only charge 5%. If your rent is $700, for example, it will cost you $35 to pay a week late, which is less than the cost of a cash advance.
Don’t make this a habit, of course, but in a one-time emergency, paying late is worth considering.
5. Get a personal loan
While you’ll still have to pay interest, it will generally be lower than the 24% you’d pay with a cash advance. The most creditworthy borrowers at Prosper, for example, will see rates as low as 6.95%. (Just note: You’ll also need to pay an origination fee.)
Are cash advances ever a good idea?
By now you can probably tell that we only recommend cash advances as a last resort. They fall second-to-last on the list of “the totally worst ways to get money” — ahead of only payday loans, which isn’t saying a lot.
So before opting for a cash advance, Melissa Joy, a certified financial planner with Pearl Planning, recommends thinking through the consequences.
“Make sure to hit the pause button and evaluate both how the cash advance will solve your current situation and what it will do to your future financial stability,” she says.
“While your short-term problems might be addressed, you could be compounding money troubles for the future.”
And, if you’re frequently turning to cash advances, it’s time to take a good look at your financial situation.
“Emergencies happen, but if you find yourself repeatedly needing credit card cash advances, you may need to make some serious lifestyle changes,” says Haynes of Spark Financial Advisors.
Ready to leave fees and cash advances behind? Click here to learn more about free $100 overdrafts with SpotMe.