How Does a Cash Advance on Your Credit Card Work?

When you get a credit card offer in the mail, you will often see “cash advance” as one of the features. Usually, this cash advance comes with a different annual percentage rate (APR) than regular credit card transactions, as well as additional fees.

What exactly is a credit card cash advance? We’re happy to explain (for details on the broader concept of cash advances, see What is a Cash Advance?).

How does a credit card work?

Before we get to cash advances, let’s cover some credit card basics.

A credit card is basically a type of loan, one that works as a “line of credit.” Instead of receiving cash as you would with a regular loan, a line of credit stipulates a maximum amount that you can borrow; you are only responsible for repaying what you actually withdraw.

Using a credit card, you can swipe the card in a store or online to make a purchase. The amount spent in that transaction is added to your card as a part of your “balance,” or how much money you’ve borrowed with the card so far; money that you will be responsible for paying back. The total amount that you can borrow on a credit card is referred to as your “credit limit.”

Once you have a balance placed on your credit card, you will be responsible for paying it back, plus interest. Every month, you will have a minimum amount that you need to repay. Usually, this amount is a small percentage of the balance plus interest.

Credit cards have a very low monthly minimum payment compared to regular personal loans. This means they can be an affordable way to borrow, but it might take many years to pay off if you only pay the minimum amount. The longer you take to pay off the card, the more interest will accrue and the more you’ll pay overall.

The standard interest rates for credit cards usually vary between 11 and 25%, depending on your credit score. Luckily, most cards also come with a 30-day interest-free grace period. This means that you have 30 days to pay off a given purchase before it begins to accrue any interest. That is why it is advantageous to pay off your balance in full every month.

Lastly, credit cards have what’s called a revolving balance. This means that the amount you can spend against your credit limit replenishes as your balance is paid down. Here’s an example:

If you had a card with a $3,000 credit limit and a $2,000 balance, you would have $1,000 left to spend before the card was maxed out. Now, let's say you paid off $500 of that balance. You’d be left with a balance of $1,500, and you’d be able to spend an additional $1,500 before you maxed out the card.

Cash advances let you use your credit card to take out cash.

Now that we’ve covered the basics of credit card use, we can turn to cash advances.

Simply put, a cash advance is when you use your credit card to get physical cash. The amount you withdraw is added to your balance, the same as with a regular credit card transaction. If you were to get a $200 cash advance, your credit card balance would go up by $200. These advances can be very useful if you find yourself in a “cash-only” emergency.

However, there are some important ways that a credit card cash advance differs from a regular credit card transaction:

• Most credit cards require an additional fee to take out a cash advance. Oftentimes this fee will be the larger of a small percentage (two to four percent) of the amount withdrawn or a set dollar number like $5 or $10.
• Cash advances do not come with the same 30-day interest-free grace period as regular credit card transactions. When you take out a cash advance, interest will start accruing on that transaction immediately.
• Most cards have separate interest rates for cash advances, and those rates are much higher than the rates on normal transactions. For example, you could have a normal APR of 18% on your card, but a rate of 24% for any cash advances.

As you can see, taking out a credit card cash advance will be more expensive than using your credit card normally. You will pay a higher rate of interest as well as a fee just to access your cash!

However, a credit card cash advance is preferable to the other type of cash advances you might encounter.

Watch out for predatory loans that advertise themselves as “cash advances.”

When you need cash for unforeseen expenses, you might think about visiting your local payday lender storefront and taking out a short-term cash advance loan. After all, you’ll pay the whole thing off in two weeks, so what’s the harm?

As it turns out, the risk for potential harm with a cash advance loan is huge; likely higher than the risk with a credit card cash advance.

Many no credit check loans, like payday loans and title loans, like to call themselves “cash advance” loans. These are products that come with very short repayment terms (often two weeks to a month) and very high APRs, usually in the range of 300 to 400%.

Theoretically, people take out these loans as an “advance” on their next paycheck, hence the name. But in reality, many people have trouble paying these loans off on time and are forced to roll the loan over and pay additional fees and interest to extend the due date.

These cash advance loans target people with bad credit because, unfortunately, those folks generally have fewer lending options available to them.

For people with poor credit scores, getting cash in an emergency can be tough. But if you’re faced with taking out a cash advance on your credit card or taking out a “cash advance” loan, you should try to use your credit card normally to purchase whatever you were planning to use the cash advance for.