Sometimes you run into unexpected financial setbacks. While it's ideal to have an emergency fund to dip into, not everyone has that option. If you have a credit card though, there are several ways of transferring cash from your credit card's line of credit over to your bank account. The most common way this is done is called a cash advance.
In this article we'll cover everything you need to know about cash advances, including:
- What is a cash advance?
- How to get a cash advance
- What to consider before getting a cash advance
- Are cash advances a good idea?
- Do cash advances affect your credit score?
What is a cash advance?
A cash advance is a loan offered by your credit card issuer. When you take out a cash advance, you're borrowing money against your card's line of credit. You must repay this loan and the amount you transfer cannot exceed the current balance available on your credit card. The amount that is transferred is then added to your credit card balance.
Unlike a credit card purchase, interest starts accruing on the withdrawal as soon as you transfer it over to your bank account. There's no grace period like there is with a typical credit card purchase. So while cash advances may be convenient, they may also be more expensive.
How to get a cash advance
There are several ways to get a credit card cash advance. In each case, the amount of money you transfer or withdraw will appear on your credit card statement and interest will begin accruing.
From an ATM
Before heading to an ATM to get your cash advance, you'll need to obtain a PIN from your credit card issuer, similar to a debit card PIN. Once you have that, you can insert your credit card into the ATM. Choose the cash advance option and enter the amount you want to withdraw. You'll need to accept any associated fees, then complete the transaction. Cash will be dispensed.
At a bank branch
Bring your credit card and a photo ID to the bank teller, and tell them the amount you would like to withdraw. There will be a fee associated with this transaction, usually between 3% and 5% of the amount being withdrawn.
With a cash advance check
You can request the cash from your credit card issuer in the form of a check that is mailed to you. When using it to make a purchase, you make the check out to the merchant and sign it. If you would like to cash the check, make it out to yourself and cash it anywhere you normally would with a personal check. The amount will be deducted from your credit card line of credit.
What to consider before getting a cash advance
Before you commit to taking out a cash advance, there are several things you'll want to consider:
- Higher APR than regular purchases: The APR on the cash advance can be significantly higher than everyday credit card purchases.
- No grace period: The same day you withdraw a cash advance, the interest clock starts ticking. You won't have the grace period that you get with credit card purchases — which is an interest-free period of approximately 21 days — starting from the day your monthly statement is generated, to the day your payment is due.
- High fees: You'll find the associated fees listed in the terms and conditions when you sign up for a card. Most of the time, these fees are equal to around 5% of the withdrawal amount.
Are cash advances a good idea?
Cash advances are a convenient, but expensive way of borrowing money. They should be used infrequently. When possible, try to use other sources to meet your financial obligations. Extra fees and higher than-usual interest rates make cash advances the option of last resort, suitable for emergencies but little else. You'll also miss out on an opportunity to earn rewards points.
Do cash advances affect your credit score?
Cash advances don't directly affect your credit score and they won't appear on your credit report. They do affect your credit utilization ratio though, and this ratio is an important factor in determining your credit score.
If the cash advance transaction causes your credit utilization ratio to go above 30%, that may have a negative impact on your credit score. Plan for this by paying off your balance by the end of the billing cycle, which will bring utilization back down.
Cash advances offer an opportunity to access cash quickly, but you must remember that it is a loan with serious financial implications. Before you decide to go this route, it's essential to consider the pros and cons. In addition, be sure to fully understand the terms and conditions you're signing up for.
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