What Is A Cash Advance? (And Why You Should Avoid Them)

By Susan Shain
October 15, 2020
Chime is a financial technology company. Banking services provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC

So you’re in a tight spot. You need some cash — and quick — but your bank account is running on empty. 

Then you see your credit card gleaming from within your wallet. 

While you could use your credit card at an ATM to get a “cash advance,” we wouldn’t recommend it. What is a cash advance? Here’s everything you need to know about cash advances, followed by five superior alternatives.

  1. What is cash advance?
  2. How does a cash advance work?
  3. How much do cash advances cost?
  4. Why cash advances are worse if you have a credit card balance
  5. 5 alternatives to cash advances
  6. Are cash advances ever a good idea?

What is cash advance?

Cash advances are short-term loans with high interest rates and fees. The two most common types of cash advances come from credit card issuers and payday lenders.

With a payday lender loan, no credit check is required, and you’re supposed to pay back the loan with your next paycheck. Because payday loans have insanely high interest rates — sometimes as high as 400% — they are often considered the worst way to borrow money. 

Credit card cash advances — which we’ll focus on in this article — are only slightly better loans. You borrow money from your available credit limit, either by withdrawing money from an ATM or cashing a paper “convenience check.”

As Lauren Zangardi Haynes, a certified financial planner with Spark Financial Advisors, explains: “Credit card cash advances can give you access to cash in a pinch, but they are typically laden with high fees and sometimes accrue interest at a higher rate.”

How does a cash advance work?

Wondering what actually happens when you use your credit card at an ATM?

Here are five frequently asked questions about credit card cash advances. 

What’s the difference between using a debit card and a credit card at the ATM?

When you use a debit card, you are withdrawing your own money from your checking account. If you use your bank’s ATM (or if your bank account has no hidden fees), there won’t be any charges.

When you use your credit card, however, you are taking a mini loan from your credit card issuer, and will therefore pay fees and interest.

Is getting a credit card cash advance different than making a credit card purchase at a store? 

Yes. Although in both cases you’re borrowing money against your credit limit, card issuers categorize cash advances differently than regular credit card purchases. For cash advances, issuers charge special fees and higher interest, and do not offer a “grace period” — which means you’ll start accruing interest on the loan as soon as you withdraw the money.

How much cash can you get with a cash advance? 

Most credit cards have a “cash advance limit” that’s lower than your credit limit. It can vary from a few hundred dollars to several thousand, depending on your line of credit. You can determine your cash advance limit by calling your credit card issuer or checking the top of your statement.

Do cash advances hurt my credit? 

Since cash advances increase your credit utilization ratio (the amount of available credit you’re using), they can cause a dip in your credit scores. Frequently taking cash advances can also signal to creditors that you’re struggling to pay your bills — and thus you’re a riskier borrower. This means a lower credit score.

Are there any other types of credit card cash advances?

Yep. Your credit card issuer may code certain non-ATM transactions as cash advances, including money orders, wire transfers, and gambling and cryptocurrency purchases.

How much do cash advances cost?

Here’s what you’ll pay to take out a cash advance — and how much it could cost you over time.

  • Cash advance fees: Typically 5% of the transaction or $10, whichever is greater.
  • ATM fees: If you use an out-of-network ATM, you’ll pay an average of $4.72.
  • Interest charges: When you take out a cash advance, you’ll begin accruing interest immediately. Many credit cards charge higher interest rates for cash advances; the average is nearly 24%.

As an example, let’s imagine you’re $500 short on rent this month. You don’t get paid until next week, and really can’t be late again, so you decide to withdraw money from the ATM using your credit card.

Off the bat, you’ll pay a $25 cash advance fee (5% of $500) and a $5 ATM fee, for a total of $30. You’ll also start accruing interest at 23.99%. So, if you don’t pay your bill until your statement arrives, you’ll owe almost $10 in interest.

Why cash advances are worse if you have a credit card balance

Although cash advances are never ideal, they get downright dangerous when you’re already struggling with credit card debt.

Say you owe $1,000 on your credit card from the last time your car broke down. Since it was a purchase, your card is charging an interest rate of 15%. You’re trying to slowly eliminate your credit balance by making the minimum payments each month.

Then, you face another emergency, and decide to take out a $500 cash advance. For this, your card charges a 23.99% interest rate. While you continue to make the minimum payments, your cash advance balance never goes down.

That’s because almost all credit card issuers apply minimum payments to the balance with the lowest interest rate (in this case, your previous $1,000 balance). If you never pay more than the minimum, that $500 cash advance would take years to pay off — and would cost hundreds of dollars in interest.

5 alternatives to cash advances

The next time you’re in a bind, here are five alternatives to compare to cash advances. 

1. Get a fee-free overdraft

What do overdrafting, cash advances, and payday loans have in common? They all come with a boatload of fees.

Chime’s feature SpotMe allows eligible members to overdraft up to $100* on debit card purchases with no fees. Whether you need a tank of gas or a cart of groceries, Chime’s got your back.

2. Ask for an advance on your paycheck

Need some cash to help you survive until next week?

Logan Allec, a certified public accountant and owner of Money Done Right, suggests asking your employer for help. It “may be able to provide a paycheck advance,” he says.

“Reach out to human resources or your supervisor to learn more about your company’s policies,” says Allec.

Or, if you set up direct deposit online through Chime, you won’t even need to bug HR. We offer our members the ability to get paid up to two days early¹ — at no cost to you or your employer.

3. Use a credit card

While we normally wouldn’t advocate spending money on a credit card unless you can pay it off immediately, credit card purchases do have two major advantages over cash advances.

  1. They don’t start accruing interest until the end of your grace period, so if you pay your statement balance in full, you’ll avoid interest charges completely.
  2. Regular credit card purchases have lower fees and interest rates than cash advances.

So if you’re in an emergency situation, it’s better to pay a bill with a credit card than with a cash advance. (You can even pay your rent through a service like Plastiq, which comes with a 2.5% fee.)

Alternatively, if you know you have a big purchase coming up, you can look for a credit card with a 0% introductory APR. The promotional period usually lasts between six and 24 months, and as long as you pay off the balance before it’s over, you won’t owe any interest.

4. Pay the late fee

Are you getting a cash advance from your credit card because you’re scrambling to make rent? Before committing, you might want to calculate how much a late payment would actually cost you. 

Most landlords offer a grace period of five days before they start charging late fees, and even then, they may only charge 5%. If your rent is $700, for example, it will cost you $35 to pay a week late, which is less than the cost of a cash advance.

Don’t make this a habit, of course, but in a one-time emergency, paying late is worth considering.

5. Get a personal loan

If you have decent credit scores, you can also consider applying for a personal loan at a bank, credit union, or peer-to-peer website like Prosper or Lending Club.

While you’ll still have to pay interest, it will generally be lower than the 24% you’d pay with a cash advance. The most creditworthy borrowers at Prosper, for example, will see rates as low as 6.95%. (Just note: You’ll also need to pay an origination fee.)

Are cash advances ever a good idea?

By now you can probably tell that we only recommend cash advances as a last resort. They fall second-to-last on the list of “the totally worst ways to get money” — ahead of only payday loans, which isn’t saying a lot.

So before opting for a cash advance, Melissa Joy, a certified financial planner with Pearl Planning, recommends thinking through the consequences.

Make sure to hit the pause button and evaluate both how the cash advance will solve your current situation and what it will do to your future financial stability,” she says.

While your short-term problems might be addressed, you could be compounding money troubles for the future.

And, if you’re frequently turning to cash advances, it’s time to take a good look at your financial situation.

Emergencies happen, but if you find yourself repeatedly needing credit card cash advances, you may need to make some serious lifestyle changes,” says Haynes of Spark Financial Advisors.

This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.

*Chime SpotMe is an optional, no fee service that requires that you receive $500 in direct deposit a month to qualify to overdraw your account up to $20 on debit card purchases. Chime, in its sole discretion, may allow you to withdraw your account up to $100 or more based on your Chime Account history, direct deposit history and amount, spending activity and other risk-based factors. Your Limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your Limit. Your Limit may be increased or lowered at any time by Chime.

¹ Early access to direct deposit funds depends on timing of payer’s submission of deposits. We generally post such deposits on the day they are received which may be up to 2 days earlier than the payer’s scheduled payment date.

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Susan Shain is a freelance writer who's been covering personal finance for eight years. She was previously on staff at The Penny Hoarder and Student Loan Hero, and has also been published by Marketwatch and Lifehacker.

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