Canada
US
You are now leaving our website and entering a third-party website over which we have no control.
What is a Cash Advance on a Credit Card?
A cash advance on a credit card is when a credit card holder borrows money against the account's line of credit. It may not be the cheapest way to get a loan, but it is among the easiest.
Because they tend to come with higher interest rates and fees, it’s important to understand how credit card cash advances work before getting one. In this article, we'll discuss the mechanics of credit card cash advances and things to know before making this type of transaction.
How do credit card cash advances work?
You probably have at least one credit card that you use for online purchases, travel or everyday expenses. It's also likely that your credit card has a cash advance feature by which the financial institution or issuer allows you to borrow money directly through the credit card to use as you wish. Here's how it works.
Use a credit card to get a cash advance
There are many sources for "cash advances," including loans from friends or family, peer-to-peer lending, credit card balance transfers and personal loans from banks. In a cash advance on a credit card, you gain immediate access to cash through your credit card. The amount of money you can borrow typically is capped at a percentage of your credit limit. Because the credit card issuer determines your creditworthiness before issuing you a card, there's no paperwork to fill out and no credit check.
You can use your card to obtain a cash advance, but you also can use blank checks, called convenience checks, that your card issuer sends you. You can use the checks as you would a personal check, but they will be counted as cash advances.
Some transactions that you might think of as purchases may be counted as cash advances by the card issuer, such as: obtaining travelers checks, money orders, lottery tickets, casino gaming chips, wire transfers, foreign currency, cryptocurrency, debt repayments, racetrack wagers, legal online wagers or similar betting transactions, prepaid cards or similar cash-like transactions.
The amount borrowed is applied to credit card balance
With a cash advance, interest begins accruing immediately. The grace period that may apply to credit card purchases does not exist for cash advances. The amount of the credit card cash advance—plus fees and interest—will be added to any existing credit card balance.
Credit card cash advances do not earn credit card rewards, such as cash back, and they don’t count toward the required spending for a sign-up bonus.
Pay balance back on credit card
Your next monthly credit card statement will reflect the cash advance itself, plus fees and interest, and you pay back the advance by making the monthly payments on your credit card.
The cash advance balance is separate from other balances on your credit card, such as for purchases or balance transfers. After you have obtained a cash advance, it could be crucial to consider going above the minimum monthly payment until the advance has been paid off. That’s because the card issuer may apply the minimum payment first to interest charges and fees, then to balances with the lowest interest rates, and finally to balances with the highest interest rates. So, depending on what other balances are on your account, very little or nothing of the minimum pay may apply to your cash advance balance, which may have the highest interest rate.
When your payment exceeds the minimum payment, the card issuer will generally apply that extra amount to the balances with the highest interest rates and then to the balances with the lowest interest rates.
So that's a credit card advance in a nutshell: you borrow against your credit limit, then pay it back.
How to get a cash advance on your credit card
Let's say your emergency fund is depleted, and you have some unexpected expenses that need to be paid immediately. You've looked at all the options and have decided that a credit card cash advance is the right short-term financial management solution. How do you go about obtaining that cash advance?
There are a few options:
In person at the bank
If your credit card issuer or bank has a bricks-and-mortar banking center, you can apply for a cash advance in person with a banking specialist.
If this is your choice, be sure to bring photo identification. You can receive your advance in cash or have it transferred to a checking or savings account.
At an ATM
When you use your debit card at an ATM, you are withdrawing money from a checking account. Similarly, you can use a credit card at an ATM to withdraw cash, however you will have to set up a PIN number beforehand. Also, before setting out to get the cash advance, check your monthly statement or card terms to see what the limit is for withdrawals. The amount you withdraw will show up as a cash advance on your credit card statement.
Most credit card companies allow card members to use their credit card at any ATM. There may, however, be associated transaction fees. Before using your credit card at an ATM, make sure you understand the fees and the ways you might avoid them.
By phone with your bank
A cash advance processed over the phone transfers money from your credit line to an account of your choosing—such as your checking account or savings account. However, not all credit card issuers allow you to complete a cash advance over the phone.
Considerations for getting a cash advance on your credit card
A credit card cash advance can be convenient, but there are some important aspects to consider before making the transaction. Here are just a few:
Interest rate on the advance amount
The interest rates on cash advances can be considerably higher than the interest rates for purchases.
Cash advance limits
The cash advance limit usually is set at a percentage of your credit limit. For example, a card with a credit limit of $7,000 may have a cash advance limit of $400 to $500.
This varies by card or lender, but in any case, you won't be able to access your entire credit line using a cash advance. The cash advance will, however, reduce the available credit on that particular card.
Cash advance fees
Cash advance fees can be substantial. They typically are a percentage of the amount borrowed or a set fee, whichever is greater. In addition, you may pay several dollars in fees if you take out a cash advance at an ATM.
Paying off your balance and making on-time payments
A cash advance starts incurring interest immediately. The sooner you pay it off, the less you'll owe, so it's generally best used as a short-term loan. Be sure those payments are on time to avoid late fees and additional interest.
Credit utilization ratio
A cash advance on a credit card counts against your credit utilization ratio. This calculation looks at how much credit you have available and how much of it you are using. It can impact 20% to 30% of your credit score, depending on the model being used.
Lenders usually want to see about a 30% credit utilization ratio on unsecured loans such as credit cards, so a less favorable ratio can affect your ability to qualify for a car loan or mortgage.
Benefits of a credit card cash advance
A credit card cash advance can be a useful personal finance tool.
Get cash immediately
There's almost no faster way of accessing cash than through a credit card cash advance. All it takes is a quick trip to an ATM. A cash advance processed at a banking center can have funds transferred to a savings or checking account quickly.
Generally no application or additional credit check
As we noted earlier, the credit card issuers have already decided you're a good risk by giving you a credit card in the first place. So, you already have the capacity to borrow these funds without any additional red tape.
No collateral required
Collateral is an asset that a borrower uses to secure a loan and a lender uses to reduce risk. It can be a physical asset, such as a car or house, or a financial asset. With a credit card advance, the credit card itself is the lender's guarantee of repayment.
A credit card cash advance can help you with debt management, but it’s generally prudent to use this option carefully and pay it back as soon as possible.