How Does a Cash Advance on Credit Cards Work?
Understand the unique mechanics and financial implications of credit card cash advances, and what to consider before using them.
A cash advance on a credit card allows you to get immediate cash by borrowing against your credit card’s available credit limit. This differs from a typical purchase, as it functions more like a short-term loan that needs to be repaid.
Defining a Cash Advance
A credit card cash advance is a short-term loan provided by your credit card issuer. Instead of using your credit card to buy goods or services, you directly withdraw cash from your credit line. This type of transaction is treated distinctly from regular purchases.
The amount you can borrow through a cash advance is typically a set portion of your overall credit limit, often lower than your limit for purchases. The transaction is added to your credit card balance, and you are responsible for repaying it with interest.
Obtaining a Cash Advance
Accessing a cash advance can be done through several methods. The most common way is by using your credit card at an ATM, which requires a Personal Identification Number (PIN).
Another option is to visit a bank branch in person. You can present your credit card and a valid form of identification to a teller. Some credit card issuers also provide convenience checks, which are blank checks linked to your credit card account. You can write these checks, and the amount will be charged as a cash advance.
Financial Implications of Cash Advances
Cash advances come with distinct financial implications. A primary cost is the cash advance fee, typically charged upfront by the credit card company. This fee is often a percentage of the amount withdrawn, commonly ranging from 3% to 5%, or a flat minimum fee, such as $10, whichever is greater. For example, a $1,000 cash advance with a 3% fee would incur an additional $30 charge.
The interest rate for cash advances is usually higher than the Annual Percentage Rate (APR) applied to standard purchases. Interest on cash advances begins accruing immediately from the transaction date. Unlike regular credit card purchases, there is no interest-free grace period.
Important Considerations for Cash Advances
Credit cards often have a separate, lower limit specifically for cash advances compared to your overall credit limit for purchases. This means you may not be able to access your entire credit line as cash. For instance, a card with a $15,000 credit limit might cap cash advances at 30%, or $4,500.
Taking a cash advance can also affect your credit utilization ratio, which is the amount of credit you are using compared to your total available credit. Since the advance increases your outstanding balance, it can raise this ratio, potentially impacting your credit score if it pushes your utilization above 30%. While the act of taking an advance doesn’t directly appear on your credit report as a unique event, the increased balance does. Cash advances typically do not earn rewards points, such as cashback or travel miles, unlike regular purchases.