Why Are Cash Advances Bad? The High Costs & Risks

Cash advances often appear to be a quick solution for immediate financial needs. These transactions, typically obtained through a credit card, allow individuals to borrow cash against their credit limit. While seemingly convenient, cash advances are widely considered a poor financial choice due to their inherent costs and potential for negative consequences.

Understanding the High Financial Burden

The most immediate concern with cash advances lies in their significant financial burden. Unlike standard credit card purchases, cash advances typically incur a transaction fee upfront. This fee is often a percentage of the amount borrowed, commonly ranging from 3% to 5%, with a minimum flat fee that can be $10 or more, whichever is greater. For example, a $200 cash advance with a 5% fee would instantly add $10 to the amount owed.

Beyond this initial fee, cash advances are subject to a higher Annual Percentage Rate (APR) compared to the rate for regular purchases. While typical credit card purchase APRs might average around 20%, cash advance APRs can be substantially higher, sometimes closer to 30% or more.

Interest begins accruing immediately from the transaction date, unlike the grace period often available with new credit card purchases. This means interest accumulates from day one, even with prompt repayment. ATM fees can further increase the overall cost, quickly inflating the total amount owed.

Potential for Debt Escalation

The high costs associated with cash advances can easily lead to a cycle of mounting debt. Because interest accrues instantly and at a higher rate, the total amount owed grows rapidly, making it challenging to pay off the principal balance. If only minimum payments are made, a significant portion of the payment goes towards interest and fees, leaving the principal largely untouched.

This scenario can trap individuals in a spiraling debt situation, potentially leading them to take out additional cash advances or other high-interest loans to cover previous ones. Using a cash advance also increases a credit card’s outstanding balance, raising the credit utilization ratio—the amount of available credit being used.

Credit scoring models, such as FICO and VantageScore, view high credit utilization negatively, generally advising against exceeding 30% of available credit. A substantial cash advance can push this ratio higher, potentially causing a temporary or even longer-term dip in credit scores. Consistent high balances or missed payments due to difficulty in repayment will be reported to credit bureaus, further damaging credit scores and making future borrowing more expensive or difficult to obtain.

Unfavorable Terms Compared to Other Financing

When considering borrowing options, cash advances stand out due to their unfavorable terms compared to most other financing methods. Personal loans, for instance, generally offer significantly lower and often fixed interest rates, providing a predictable repayment schedule over a set period. This structured approach makes personal loans a more transparent and typically cheaper option for larger, planned expenses or debt consolidation.

In contrast, while credit card purchases can also carry high interest rates if balances are not paid in full, they typically benefit from a grace period. This allows cardholders to avoid interest charges on new purchases by paying their statement balance in full by the due date. Cash advances do not offer this grace period, with interest starting immediately.

Even other short-term borrowing solutions, such as secured loans or lines of credit, can offer more favorable terms for those who qualify, often featuring lower interest rates due to collateral. The high fees, immediate interest accrual, and elevated APRs make cash advances a less advantageous choice than many alternative borrowing avenues.