What Is a Cash Advance and How Does It Work?

A cash advance is an option you might consider if you need money quickly in urgent financial situations. It’s a way of withdrawing cash from your credit card account, similar to how you would withdraw money from your bank account with your debit card. But it’s possible that taking out a cash advance on your credit card could indirectly have a negative impact on your credit score.

In this article, we’ll discuss how cash advances work and the important information you should know about cash advances before you consider using this type of financing.

What is a cash advance?

A credit card cash advance is a withdrawal of money from your credit card account; this means you are borrowing money from your credit card account. It may seem similar to withdrawing money from your bank or an ATM using your debit card, but there are some key differences.

When you make a debit card withdrawal, you are accessing your own funds from your bank account. With a cash advance, you are essentially borrowing the money from your credit card company, and the amount you withdraw will be charged to your account.

Cash advances often come with transaction fees and a higher annual percentage rate (APR), and there are often limits on how much cash you can take out with a cash advance.^[1]

How to get a cash advance from a credit card

If your credit card allows you to take out cash advances, there are a few different ways you can access the money.

• ATM - In the same way you can withdraw funds from an ATM using your debit card, you can get a cash advance from an ATM using your credit card and personal identification number (PIN). If you use this method, you’ll also need to be aware of any ATM withdrawal limits or fees similar to those you might get on checking accounts.
• Convenience checks - Your credit card issuer can send you a convenience check that is linked to your credit card account. These checks work in the same way as normal checks, meaning you can cash them or submit payments with them, and these are charged against your credit account.
• At a branch - You may be able to take out a cash advance in a bank or credit union branch using your credit card and your personal identification.^[2]

Cost associated with cash advances

A credit card cash advance is a costly way to withdraw cash. Aside from paying back the advance itself, you’ll also have to consider these charges:

• Cash advance fee - Credit card companies will typically charge a fee for using your credit card’s line of credit to withdraw cash. The amount you pay depends on the card issuer, but fees can be between 3% and 5% of the cash advance amount or $10, whichever is higher.^[2]
• Cash advance APR - The APR on a cash advance will usually be higher than the APR you pay for direct credit card purchases. Unlike purchases, which have a grace period before you start accruing interest, the interest on a cash advance starts to accrue as soon as you withdraw the funds.^[3]

How cash advances and credit card purchases differ

While you can use your credit card to take out a cash advance and use the money to pay for things, doing this has a number of differences compared with making purchases directly using your credit card.

• Fees and APR - As we mentioned, the fees for taking out a cash advance can be substantial, and the APR will usually be higher for a cash advance than for a regular credit card purchase. ^[3]
• Cash advance limits - Usually, the limit for a cash advance will be lower than your credit card’s total limit. For example, if your credit card has an overall limit of $10,000, you might only be able to take out $2,000 as a cash advance.^[2]
• Order of repayments - If you already owe a balance on your credit card when you take out the cash advance, your card issuer might put your payments towards your regular purchases first, and once they are paid off, they will then apply your payments to your cash advance balance. If you only make the minimum payment, or pay less than your total purchase balance, this means your cash advance balance and its higher APR will be outstanding for longer, allowing more interest to accumulate. Your card issuer’s specific policies on calculating and applying your minimum payments will be listed in your card’s user agreement.^[4]

Can a cash advance damage my credit score?

Taking out a credit card cash advance won’t directly hurt your credit score, but there are indirect ways that cash advances can impact your credit score negatively in the long run.

Risk of late payments

If you use a credit card cash advance, your monthly credit card payment will increase if you aren’t able to pay off your balance in full straight away. If you are struggling to make payments, this higher monthly payment could increase your risk of paying late. When you make your credit card payments late (usually by 30 days or more), a late payment can end up on your credit report and stay there for seven years, creating a negative impact on your credit score.^[5]

Increasing your credit utilization ratio

Your credit utilization ratio (CUR) is the amount of your total credit that you are using, expressed as a percentage. For example, if your credit limit is $5,000 and you have a balance of $1,000, your credit utilization ratio is 20%.

When you take out a cash advance, it could increase your credit utilization ratio, and this could negatively affect your credit score. Some financial experts recommend you keep your credit utilization ratio below 30%. However, there is no set number that can cause damage to your score, and data doesn’t suggest that your credit score will dip once your credit utilization ratio goes above 30%. Generally though it is better to keep it below 30% and ideally below 10%. As cash advances often come with fees and higher interest rates, they can potentially increase your credit utilization more quickly than regular credit card purchases.

If you’re unable to pay off your cash advance right away, it could damage your credit score, as well as being an expensive way to borrow money when you may already be experiencing financial constraints.^[4]

Payday loans

A payday loan is another type of cash advance whereby you receive a portion of your future paycheck early. To get a payday loan, most companies that offer them will ask you to write a post-dated check or authorize them to debit your bank account.

These loans are usually small (often $500 or less) and have short repayment terms, often due by your next payday, though in some states this can be extended if you pay an extra finance charge.^[6]

According to the Consumer Financial Protection Bureau, finance charges on payday loans can range from $10 to $30 for every $100 you borrow, but this varies from state to state. If you borrowed $200 two weeks before your next payday, with a finance charge of $15, you would have to pay back $230. At $15 per $100 borrowed, this would equate to an APR of around 400% for a two-week loan.^[7]

Alternatives to cash advances

While you might be considering a cash advance to get access to cash when you need it, cash advances are an expensive way to borrow money, with additional fees and high APR, as well as the potential to indirectly harm your credit score.

There are some other, potential options that may offer lower associated costs you might want to consider if you need funds in a time of immediate financial need:

• Making purchases with your credit card - If you’re able to, using your credit card to make a purchase instead of taking out a cash advance could be a more affordable option. However, remember that if possible, it’s best to pay off your full credit card balance each month to avoid revolving a balance, which could impact your credit score. Rates are usually lower on credit card purchases, so even if you do carry a balance, the interest rates will be lower compared to a cash advance, and you’ll also avoid the cash advance fee.
• Personal installment loan - You might be able to get a personal installment loan if you need to access cash quickly. These loans are repaid in monthly installments, making it easier to budget the repayments. The lender could also report your payments to the credit bureaus, which might add to your credit mix, so if you make the payments on time, they are another form of credit that can help build your credit score. The interest rates on personal loans are typically lower than those on cash advances, too.
• Private loans - Borrowing money from a family member or friend could be a more affordable option than taking out a cash advance. But remember, there is a risk you could impact your relationship if you don’t repay the money on time. Be sure to set up a clear repayment plan and avoid late payments.
• Payment plans - For certain expenses, you might be able to negotiate a payment plan directly with the vendor. This means you can pay a large bill off over time without taking out more debt. For medical costs, hospitals often have payment plans with little or no interest, and you could access hardship programs that cover part of your debt. For other emergency expenses like home or car repairs, contractors or mechanics might be able to offer payment plans directly or through third-party financing companies. Be sure to evaluate the costs and fees associated with third-party financing companies compared to cash advances, as some can have high costs as well.^[8]

Bottom line

A cash advance can give you access to money quickly if an unexpected or emergency expense pops up. However, borrowing money in this way could mean you end up paying additional fees and higher interest rates compared to other types of financing.

If you are considering a cash advance, make sure you take time to understand the costs associated and consider whether it will have an impact on your credit score. Make sure you can pay off the debt as soon as possible to reduce extra costs and avoid negative effects on your credit. You could also think about other types of financing that may be less costly and still relevant to your situation.

Sources

1. Bank of America, “What is a Credit Card Cash Advance?” https://bettermoneyhabits.bankofamerica.com/en/credit/what-is-a-credit-card-cash-advance
2. Experian, “What is a Cash Advance Fee?” https://www.experian.com/blogs/ask-experian/what-is-credit-card-cash-advance-fee/
3. Chase, “Credit Card Cash Advances” https://www.chase.com/personal/credit-cards/education/basics/how-do-credit-card-cash-advances-work
4. MyFICO, “What Should My Credit Utilization Be?” https://www.myfico.com/credit-education/blog/credit-utilization-be
5. Equifax, “Can You Remove Late Payments From Your Credit Report?” https://www.equifax.com/personal/education/credit/report/articles/-/learn/remove-late-payments-credit-report/
6. Lending Tree, “What is a Cash Advance?” https://www.lendingtree.com/credit-cards/articles/cash-advance/
7. Consumer Financial Protection Bureau, “What are the costs and fees for a payday loan?” https://www.consumerfinance.gov/ask-cfpb/what-are-the-costs-and-fees-for-a-payday-loan-en-1589/
8. Oppo Loans, “5 Alternatives to an Expensive Cash Advance” https://www.opploans.com/oppu/cash-advance/5-alternatives-to-an-expensive-cash-advance/

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.

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