Does it ever make sense to get a cash advance?
By Allie Johnson
December 21, 2015
You're short on funds for holiday gifts, cash to go gambling with your pals or money for rent. These are all bad reasons to take a credit card cash advance, which can get you out of a real jam only if used wisely as a last resort.
First, if you're considering taking a cash advance, it could be a red flag indicating that you have overall money management problems that need to be addressed, says Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions. Cash advances should not be used to solve general cash flow issues, he adds.
That also applies when it's a family member in a financial pickle, as Vannessa Wade, owner of Houston PR firm Connect the Dots, learned. She took a $1,500 cash advance to help pay school expenses for a relative's child. She never was repaid, and, because she already had a balance on her card, it took a year and a half to pay off the bill.
“Lesson learned: No more cash advances,” Wade says.
When do cash advances make sense?
Cash advances can be a lifesaver in some very specific situations. But, as Wade found out, they also have a few big downsides. For example:
- Transaction fees. Most credit card companies charge a transaction fee for each cash advance, sometimes as much as 5 percent of the amount borrowed, Citi notes.
- High interest. The interest for cash advances can be significantly higher than that for purchases. A 2015 CreditCards.com survey found an average cash advance APR tops 23.5 percent, more than 8.5 percent higher than the average purchase APR. “The interest ate me up,” Wade says of her cash advance.
- No grace period. Interest on cash advances typically starts accruing as soon as you stick the money in your wallet. “The interest kicks in right away,” says Carrie Friedberg, a San Francisco money coach with SF Money Coach.
“Cash advances can get really expensive quickly.”
— Thomas Nitzsche,
ClearPoint Credit Counseling Solutions
All those “layered” fees add up, Nitzsche says, adding: “Cash advances can get really expensive quickly.”
However, cash advances can come in handy if you truly need cash now to pay for a necessary expense and you know you can pay the debt off quickly, he says.
For example, say you're stuck in a small town with car trouble and have to pay a mom-and-pop mechanic who doesn't accept cards. Or, your basement flooded and you need cash to buy a reasonably priced used dehumidifier from a neighbor. “If it's a need, it's a need,” he says.
One consumer, Olivia Walker, who works in marketing in New York City, says she used a cash advance in 2014 when she was in college. She lost her debit card on a weekend and, on Monday, when her bank was closed for Columbus Day, had to pay sorority dues and a deposit for a school trip. She took a $150 cash advance on her Discover card and paid her bill in full on Tuesday.
“It was a really positive experience,” she says.
“Lesson learned: No more cash advances.”
— Vannessa Wade,
owner of Houston PR firm
Connect the Dots
So, how do you get a cash advance if you need one? In its most common form, you visit a bank branch or use an ATM to withdraw cash from your credit card account. “Essentially, you're borrowing against your credit card to put cash in your pocket, which can be convenient when you're occasionally short of funds,” according to Bank of America.
However, you probably can't take out your entire credit limit in cash. Most credit card companies have a cash advance cap that's lower than your total limit, according to Bank of America.
Another way to get a cash advance is to write a credit card check or to do an online transfer so the money goes straight into your bank account instead of your wallet. This typically results in a delay of about five days, but processing the cash advance that way may allow you to avoid the cash advance cap.
There are other types of transactions that are processed as cash advances. For example: getting a money order, wiring money, swiping your card to get cash to gamble at a casino and using your card to bail a buddy out of jail.
It's important to be clear on whether a transaction you're making is a cash advance, Nitzsche says. Generally, if you're getting money rather than a product or service, even if the money doesn't go directly into your hands, it's a cash advance.
“It's usually pretty intuitive,” he says.
“Ask yourself, 'Is it worth that amount to get this amount today?'”
— Carrie Friedberg,
a San Francisco money coach
with SF Money Coach
Keep a cash advance from turning into a disaster
Considering a cash advance or already took one? Follow these four tips to avoid the cash advance blues:
- Brainstorm alternatives. If you need cash quickly, maybe you can sell something you own to raise the money instead. Or, you could use your credit card to pay for something for which you'd normally use cash, then use the cash you free up instead of getting a cash advance, Nitzsche says. You're still using a card, but at least the transaction gets processed as a normal purchase rather than a cash advance, he says. “You have to think outside the box,” he says.
- Know the devil is in the details. Before you make your decision, read the fine print, Friedberg says. Look up your card's transaction fee and interest rate for cash advances either online or in your card's terms and condition contract, she says. Then crunch the numbers to find out how much the advance will actually cost you, based on the length of time it will take you to pay it off, she says. “Ask yourself, 'Is it worth that amount to get this amount today?'” she says.
- Make a payback plan. It's important to repay the cash advance quickly. If you wait until you get your next credit card statement, you'll already owe more than you took out. So, if you can pay sooner, as Walker did, do it. If you have a balance apart from the cash advance, remember that the federal Credit Card Accountability, Responsibility and Disclosure Act of 2009 requires issuers to apply any payment you make over the minimum to your highest-interest debt first. So, pay as much as you can over the minimum to reduce your higher-interest cash advance debt.
- Consider credit counseling. If you're having overall cash flow problems, consider making an appointment with a nonprofit credit counseling agency to get your budget sorted out and get on the road to building an emergency fund, Nitzsche says. If you already took a cash advance and are struggling to pay it back, setting up a debt management plan through an agency could lower your interest and give you breathing room, he says.
Every financial decision depends on the individual situation, Friedberg says. But, in general, cash advances are not the best idea. “You have other options,” she says.