How to Use Your Credit Limit for Cash

A credit card’s credit limit represents the maximum amount of money you can borrow using that card. While credit cards are primarily designed for making purchases, they also offer ways to access cash from your available credit. Such transactions, however, come with specific financial considerations that differ significantly from standard purchases.

Cash Advances from Your Credit Limit

A cash advance involves borrowing actual cash against your credit card’s available credit line. This is distinct from using your card for everyday purchases, as the funds are immediately available to you. You can typically obtain a cash advance by withdrawing money from an ATM using your credit card and a personal identification number (PIN), requesting funds directly at a bank branch, or by cashing convenience checks provided by your credit card issuer.

These transactions incur specific fees. Credit card companies generally charge a cash advance fee, which is often a percentage of the amount withdrawn, commonly ranging from 3% to 5%, with a typical minimum fee of $10. For instance, a $100 cash advance with a 5% fee would cost you $5, in addition to any ATM operator fees.

A significant difference for cash advances is how interest accrues. Unlike regular purchases, which often have a grace period before interest begins to apply, interest on cash advances usually starts accumulating immediately from the transaction date.

The Annual Percentage Rate (APR) for cash advances is also typically higher than the APR for standard purchases. While purchase APRs might be in one range, cash advance APRs can be several percentage points higher, sometimes reaching 20% to 30% or more. This higher interest rate, combined with immediate accrual and upfront fees, makes cash advances an expensive way to access funds.

Accessing Cash Through Balance Transfers

Another method to potentially access cash from your credit limit involves a balance transfer. While balance transfers are typically used to consolidate existing debt from one credit card to another, they can sometimes be adapted to get cash into your bank account. This process usually involves initiating a balance transfer from your credit card to your own checking or savings account, often through a balance transfer check provided by the issuer.

Balance transfers also come with fees, typically a percentage of the amount transferred, often ranging from 3% to 5%. For example, transferring $1,000 would incur a $30 to $50 fee, which is added to the transferred balance.

A key feature of many balance transfer offers is an introductory 0% APR period, which can last anywhere from six to 21 months. During this promotional period, no interest is charged on the transferred amount, assuming you make minimum payments on time. Once this introductory period expires, any remaining balance will be subject to the card’s regular balance transfer APR, which can be comparable to or even higher than standard purchase APRs.

Unlike cash advances, interest on balance transfers generally begins accruing only after the introductory period ends. However, if you fail to make minimum payments or violate other terms, the promotional APR can be revoked, and a higher penalty APR might apply. While using a balance transfer for cash can offer a temporary reprieve from interest, it requires careful management to avoid significant costs once the promotional period concludes.

Understanding the Financial Implications

Using your credit limit for cash, whether through a cash advance or a balance transfer, carries substantial financial implications due to fees and interest rates. Additionally, accessing a significant portion of your credit limit can negatively impact your credit utilization ratio. This ratio compares the amount of credit you are using to your total available credit. Financial experts generally recommend keeping your credit utilization below 30% to maintain a healthy credit score. Using a large portion of your credit limit for cash can increase this ratio, potentially lowering your credit score and making it more difficult to qualify for other loans or credit at favorable terms in the future.

Accumulating substantial debt quickly is a considerable risk with these methods. High interest rates, especially on cash advances, can lead to a debt cycle where payments primarily cover interest rather than the principal balance. This can result in increased minimum payments over time and a longer period to pay off the debt. Due to these financial burdens, using a credit limit for cash should generally be considered a last resort when other, less expensive financial options are unavailable.