So you need some cash, and you need it quick. What about taking a cash advance from your credit card?
Well, unless you really don’t have any other options, it’s not a good idea. We’ll break down the reasons why in this article, then outline alternatives that make a lot more sense when you need cash in a pinch — as well as a few that don’t.
What Is a Cash Advance?
A cash advance is simply a loan that your credit card company makes you. You’re able to borrow cash against your credit card up to a certain limit. These limits vary by card, but they’ll usually be a lot lower than your credit limit. You can get the money easily: at the bank, from an ATM, or by filling out one of those convenience checks that your card issuer sends periodically.
It sounds convenient — and it is! But the price for that convenience is high. Here’s why:
Steep cash-advance fees
Unfortunately, a credit card cash advance is a very expensive way to get money. Your credit card company charges a hefty fee for the service: For example, you may pay either 5% of the transaction or $10, whichever is greater. And if you use an out-of-network ATM for your cash advance, you’ll pay ATM fees, too.
High interest rates
Once you get over the sticker shock from the upfront fee on your cash advance, you aren’t done paying. The vast majority of credit cards charge a higher-than-normal interest rate for a cash advance. So even if you’re only paying a 12% or 15% APR on your purchases, you could be paying an average of nearly 24% on your cash advance.
No grace period
When you make a purchase with your credit card, you usually have about a month to pay back the money without paying any interest. This grace period allows responsible borrowers to take advantage of credit cards’ convenience and build their credit score without sliding into shaky financial territory. But when you get a cash advance, you have no grace period. You’ll start paying that high interest rate immediately.
The True Cost of a Cash Advance
Let’s look at an example of how costly a cash advance can be.
Perhaps you need $800 in a pinch for a cash-only purchase — maybe to buy something off Craigslist or to pay a friend for playoff tickets. To get your hands on that cash, you’ll first have to pony up $40 (5% of the transaction) for the upfront fee. Then, as soon as you have the money, the clock starts ticking on a 24.9% cash advance APR.
What if you can only afford about $50 a month to pay back the bill? Between both principal and interest, you’ll ultimately pay about $1,000 over 20 months for your cash advance. Add the fees, and you’ll have paid about $1,040 to get your hands on just $800.
Cash Advance Alternatives
In this section, we’ll assume you need cash for something that you can’t charge using your credit card. If that’s not the case, by all means, use your credit card. You won’t pay an upfront fee, your APR will be lower, and you’ll have your normal grace period to give you a chance to pay back the balance interest-free.
Your emergency fund
If your checking account has run dry, tap your emergency fund before taking out a cash advance. Don’t have an emergency fund? Now is the time to start saving up. Aim to keep at least $1,000 in a spot that’s easy to access, such as a savings account. Once you’ve hit that goal, try to build up to six months of living expenses, assuming you’re not also trying to pay off a lot of high-interest debt.
A loan from friends or family members
It might hurt your pride to ask, but if you’re truly in a jam, perhaps someone you know and trust can lend you money. But remember that your relationship with that person could go south quickly if you can’t make good on your promise to pay back the loan in a speedy fashion. For some, that might be too big of a risk to take.
An advance on your paycheck
If you have a good relationship with your employer, they may be able to help you by giving you an advance on your next paycheck. You simply pay back the advance with your next paycheck, or spread it over several of your next paychecks.
In a small business, you may owe nothing but gratitude for your employer’s generosity. Larger employers may have an established process in place for this request, and may charge a fee. Whatever the case, just like asking for money from friends and family, be careful not to make a habit of it.
A personal loan from a bank, credit union, or online lender
Personal loans come in a lot of forms, but the personal loans we recommend are unsecured (meaning they require no collateral to obtain) with a fixed interest rate and a fixed payment. They can typically be used for any purpose, unlike mortgages, car loans, and the like.
The main downside? You’ll usually have to have above-average credit to qualify for an unsecured loan with a reasonable interest rate from a reputable lender.
Many banks and credit unions make personal loans, as do online lenders including peer-to-peer giants such as Prosper and Lending Club. Credit unions are particularly worth a look because they often have more leeway with their lending criteria.
Cash Advance Alternatives to Skip
There are a few other ways to get quick cash, but believe it or not, these financial sins are usually even worse than taking a cash advance from your credit card.
Whatever you do, steer clear of payday loans. These small, short-term loans are easy for anyone with proof of income to get, regardless of credit score. Write a check for the loan amount plus interest, and the payday lender holds it until after your next payday. Easy, right? Yes, but convenience is where the advantages of payday loans end.
If you think cash advances are expensive, hold on to your hat: You could pay $10 to $30 to borrow just $100 with a typical two-week payday loan, according to the Consumer Finance Protection Bureau. In fact, the average APR is just shy of 340%.
But wait: The payday lender will let you simply pay the interest and roll over your loan so you can get more cash. Sounds nice, but many borrowers become dependent on the payday loan, rolling it over indefinitely since they can’t afford to pay back the principal. A quarter of borrowers owe payday lenders for 80% of the year, the CFPB has found.
Auto title loans
Auto title loans also prey on borrowers who need money in a pinch but don’t have the credit score for a more reputable loan. These short-term loans require you to pledge your car as collateral to get the loan, but you’re usually only able to borrow much less than your car is actually worth. Using your car as collateral also means you can lose your car if you don’t pay back the loan on time.
Like payday loans, auto title loans can have extremely high APRs of up to or over 300%, according to the Center for Responsible Lending. These lenders also let borrowers continually renew the loan by paying only interest, trapping them in a cycle of debt.
Borrowing from a retirement account
If you have money socked away in a 401(k), your plan may offer you an option to borrow up to half your account balance at a low interest rate and repay it within five years. Sounds appealing, but there are two major issues: 1) Your money can’t grow if it’s not in your account, and 2) you’re likely to keep doing it, which compounds the first problem.
If your funds are in an IRA, you technically can’t get a short-term loan. You can take money without paying taxes and penalties on it during a rollover, but the money has to be back in an IRA within 60 days. New rules also dictate that you can only do this once a year, regardless of how many IRAs you have.
Borrowing from a retirement account may make sense as a last resort for larger emergencies, or for one-time life events such as buying a house. However, it’s probably best to avoid going down this rabbit hole for smaller cash-flow issues that a cash advance would fix.
Use Cash Advances Sparingly — and Responsibly
If you need quick cash for a truly essential reason, you’ve weighed your options, and a cash advance still seems like the best route, you can minimize the damage by taking the following steps:
- Make sure you know the fees, APR, and limit for your cash advance.
- Only get a cash advance for what you absolutely need — this is not the way you want to get extra “play money.”
- Don’t get a cash advance with a credit card that already has a high balance. Using too much of your available credit can have a negative impact on your credit score.
- Pay back the advance as soon as you can. Remember, you have no interest-free grace period.
- Don’t make cash advances a habit. Start saving whatever you can to ensure you have an emergency fund to tap the next time you need cash.
To learn more about building up your savings so you can avoid the astronomical fees and interest of cash advances, check out these past articles: