Credit Loans

What Does a Cash Advance Mean on a Credit Card?

If you have a credit card, your credit card company may allow you to withdraw cash up to your credit limit. This process, known as taking out a cash advance, is something many card issuers offer. For those times when you need cash and don’t have enough in your bank account, you can rely on a credit card cash advance. 

However, before you take out cash advances, check your credit card terms and services to ensure you won’t accrue any extra fees or interest charges. According to the Consumer Financial Protection Bureau, also known as the CFPB, a credit card company has the right to increase your interest rates if you are more than 60 days late on a payment. To avoid accruing interest and having issues with your credit card issuer, make sure you are prompt about paying back any cash advance you may borrow. 

Having a line of credit like a credit card can be extremely handy when making a cash purchase or transaction. For those times when you are between paychecks and just need to make a few regular purchases, you can use a cash advance to cover those expenses until you get paid. Think a cash advance is the right option for you? Read on to learn more! 

What is a Credit Card Cash Advance?

A cash advance on a credit card is a way to get cash now and pay it back later. Also known as a revolving line of credit, a credit card account usually comes with a cash advance option. A cash advance allows people to withdraw money up to their cash advance limit. 

Sometimes, credit card companies allow a grace period to give their borrowers more time to pay back what they owe. Essentially a set amount of time where borrowers aren’t required to make loan payments, a grace period on credit card purchases or cash advances can make taking care of balances a bit less stressful. 

What are the Pros and Cons of Cash Advances?

In place of applying for a bad credit loan, cash advances are usually an additional option for anybody with a credit card. However, to make the most informed financial decisions for yourself, you should be aware of both the pros and cons of a cash advance. 

A benefit of getting a cash advance is that you’ll be paying interest only on what you borrow. Usually, when you take out a loan, you pay interest on your total funded amount, even if you don’t use all the money.

A cash advance only requires the borrower to pay interest on what they take out and use. 

There are also a few negative aspects of a cash advance you want to be aware of. Often, credit cards can come with a high interest rate or APR. Understanding interest rates and the cost of borrowing is critical for any financial product. It will hugely impact how much the borrower will end up paying back overall. If the interest rates on your cash advance are too high for you to afford, you may end up falling into a cycle of debt.

Depending on how you use it, taking out a cash advance could either be a pro or a con for your credit score. Generally, credit scores are a combination of five different financial factors. The factors that work together to determine a credit score are credit mix, length of credit history, amounts owed, payment history, and new credit. If you pay back your cash advance in a timely manner, your credit score may benefit. But, if you fail to pay back your cash advance, you may see your credit score take a hit and go down. 

Associated Fees with Cash Advance on a Credit Card 

When you take out a cash advance on your credit card, it’s like you are spending that amount of cash. So, just like using or borrowing money on a credit card, you’ll be charged interest. Cash advances often charge a cash advance fee of 5% or $10, whichever is greater. And the interest that accrues tends to be higher than a regular credit card purchase as well.

What are the Alternatives to a Cash Advance on my Credit Card? 

Instead of getting a cash advance and racking up your credit card balance, you may want to look into these alternatives: 

Personal Loans vs. Credit Card Cash Advances

Instead of withdrawing money and getting cash advances, you may want to look into a personal installment loan. Depending on your credit, you may qualify for a good personal loan. If you’re looking for a better deal on an APR, a personal choice may be a good idea over a cash advance. 

Payday Loans vs. Cash Advances on Credit Cards 

If you’ve ever been strapped for cash, you may have thought about getting an online payday loan. Payday loans are incredibly short-term loans that usually come with high interest rates. If you don’t pay back a payday loan in a very short period, interest rates and fees may cause your balance to increase significantly. Therefore, the cost of getting a payday loan may not be worth the money. 

Secured Loans vs. Cash Advance on Credit Cards 

It’s important to understand what a secured personal loan is. Essentially, it’s any type of funding that uses collateral. Home equity loans or car title loans are two examples of secured loans. But, with secured loan options like auto title loans, you may run into a hidden fee or unreasonable monthly payment. So if you’re looking to get a better deal on funding, you may want to go with a personal installment loan over a secured title loan. You also run the risk of losing your collateral with a secured loan.

Debit Card vs. a Credit Card Cash Advance 

Instead of a short-term loan or a cash advance, you could utilize the money in your bank account and use your debit card for transactions instead. If you are looking for cash to make your purchases, you can also go to an ATM and withdraw the money you need directly from your bank account. 

Balance Transfers vs. Credit Cards 

If your checking account is looking a bit low, but you have sufficient funds in a savings account, you might want to consider transferring a bit of your balance from your savings to your checking account. Utilizing the money you already have over taking out a cash advance will help you save money on burdens like a high interest rate.

References:

CNBC—Most Common Credit Card Terms and Definitions

Consumer Finance—Credit Cards Key Terms