How Credit Card Cash Advances Work & What to Do Instead

Credit card cash advances are so tempting – sometimes you’re in a pinch and you need to cover off your bills, pay for an emergency repair or have some spending money for the week.

While cash advances might feel like an easy solution to your financial woes, they’re an expensive Band-Aid solution that could snowball into more problems. Here’s why cash advances should be a last resort option and what you can do instead of turning to them the next time you’re in a bind.

What Is a Credit Card Cash Advance?

Image

A cash advance is cash loan from your credit card issuer – you’re essentially withdrawing from your credit card account for cash. Cash advances can come in the form of withdrawing cash at an ATM, using “convenience cheques” that come with your credit card, or other transactions, such as using your credit card to pay for money orders and wire transfers.

Why You Should Avoid Cash Advances

While cash advances are tied to your credit card, they come with a completely different set of terms and conditions, which vary between credit card companies, compared to when you’re swiping or tapping for your purchases.

With convenience and ease come hefty consequences – there are a handful of reasons why you should steer clear of credit card cash advances. They include:

Expensive Fees

When you turn to a cash advance, you’re already incurring steep fees typically calculated according to how big your transaction is and how much you’re withdrawing from your account. Typical fees could range from a fixed flat rate of, say, $5 to $10 or a percentage of the amount being borrowed, from one per cent to as high as seven or eight per cent. The fee is usually whichever of the two - a flat rate or a percentage of your transaction – is higher. If you’re withdrawing from your credit card through an ATM, be prepared to face additional ATM fees too!

High Interest Rates

Not only do you incur fees for your cash advance transaction, but steep interest rates are tacked on, which are higher than the interest rates you pay for regular purchases on your credit card. Your cash advance shows up on your credit card statement along with your other transactions on your monthly card statement, but interest starts accruing right away.

Important Credit Card Jargon and Terms to Know

No Grace Period

Credit cards can be a convenient tool to pay for your monthly expenses while reaping rewards points or cash back, but this method is only worthwhile if you pay off your balance in full every month. Regular purchases on your credit card come with a grace period – conventionally it’s about 21 days after your statement date. Unfortunately, this perk doesn’t extend to cash advances; interest rates kick in immediately. Watch out for this caveat – you could have accrued quite a bit of interest on your cash advance by the time your credit card issuer sends you your monthly statement!

No Perks

When used responsibly and paid in full, credit cards come with many perks, such as rewards points, cash back incentives, extended warranties, and purchase protection. Cash advances don’t come with any of these benefits – in fact, because it’s seen as a cash loan against your credit card, rewards points for your spending aren’t even provided.

4 Ways to Tell if Reward Credit Cards are Worth It for You

Limitations

Credit card issuers distinguish cash advances separately from regular purchases, and with that comes a separate set of conditions when it comes to minimum payments, how much can be withdrawn from your credit card limit, and how payments are applied to cash advances, as prime examples. Your card, for instance, may only let you withdraw 20 per cent of your credit limit.

5 Reasons to Avoid Instant Payday Loans

What To Do Instead of Using Cash Advances

Read your terms and conditions carefully to ensure you’re aware of the fees, interest rates, how payments work, and any penalties involved with using your credit card for cash advances.

However, to avoid using cash advances try these options instead:

Determine If You Really Need the Money

Once you’re aware of how much it will cost to take a credit card cash advance, determine if you really need the money, if you can make do without, or if you can manage with a smaller amount. Let your budget be your guide, not only to determine if you need the money, but how you will manage repayment.

How Overdraft Protection Really Works

A Private Loan from Family or Close Friends

If your parents, grandparents, or other close family member or friend has the means to lend you money, working with them to draw up a private loan and concrete repayment plan would free you from steep interest rates and fees tied to cash advances. If you lay out the parameters of the loan and make repayment them a priority, this could be your saving grace.

Withdraw from Your Assets

If you own a home or have savings in a retirement savings plan (RRSP) or a tax-free savings account (TFSA), you could consider taking equity out of these assets to free up some cash. Talk to a financial advisor before you do so, however, because some withdrawals could lead to paying taxes and penalties. It’s also always harder to save than it is to spend so taking money out of long-term savings to pay for needs now can leave you short in the long run. While taking money out of an RRSP is a debt relief option, it’s one we only recommend using as a last resort.

What You Need to Know Before Taking Out a Home Equity Line of Credit

Ask for a Bank Loan, Consolidation Loan, Line of Credit, or Credit Card Limit Increase

If you’re a responsible account holder with a solid credit rating, and a positive relationship with your financial institution or creditor, you could ask for a personal loan, line of credit from your bank, or an increase on your credit card limit – a trio of options that could get you more cash in the interim. In these instances, your interest rates would be lower than cash advance rates. You might also benefit from a debt consolidation loan – another question to ask your lender before you take an expensive cash advance.

The Hidden Danger of Using a Line of Credit to Consolidate Debt

Emergency Savings Fund

If you have an emergency savings account, now might be the best time to use it. If you’re in dire straits financially, your emergency savings fund may be a better bail out plan than a cash advance. Just make sure to replenish this account as soon as you can!

Where to Get Help With Your Debts

Thinking that you need a credit card cash advance to make ends meet might just be the warning sign you need to heed that you need help with your debts and money. Contact us now and we will answer your questions and give you guidance about how to deal with your difficulties. If you would like to speak with a professional Credit Counsellor, we will be happy to schedule you an appointment, either in person or over the phone – whatever works best for you. Our appointments are free, confidential, and don’t obligate you to anything further. The Counsellor won’t judge your situation or choices, just provide you with options and solutions to get you the debt relief you need. Contact us by phone, email, or anonymous online chat. We’re happy to help.