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There’s a limit
overall credit limit. Let’s say a credit card has a credit limit of $5,000. It’s possible that the cash advance credit limit is $1,500. It’s important to know the cash advance credit limit before borrowing the funds.
There are three ways to access the money
- From a bank by showing your card and ID to a teller
- From an ATM by using the PIN number associated with the account
- By using a convenience check provided by the credit card issuer
The APR will be higher
The APR you are charged for money taken through a cash advance is higher — often much higher — than the APR charged for standard purchases.
There is no grace period
When you make a standard purchase with a credit card, you usually have until the end of the billing cycle to pay it off and avoid paying interest. The same is not true of cash advances. The day you accept the funds is the day interest begins to accrue on the debt.
The average interest rate on credit cards as of this writing is %. While cash advance APRs vary by credit card issuer, they can easily be 5 to 10 percentage points higher than the standard purchase rate.
On top of the interest rate, issuers normally charge a cash advance fee from 3% to 5%, or $5 to $10, whichever is higher. And if you take the funds from an ATM, you may end up paying an ATM usage fee of around $4.50.
To put it all in perspective, let’s take a look at how much more using a credit card for a cash advance can cost than using the same credit card for a standard purchase. In this example, we’re assuming it takes one year to pay the card off in full.
The larger the cash advance and the longer it takes to pay it off in full, the more expensive the transaction will be. In this scenario, paying it off in one year minimized the damage done by the higher interest rate.
Is a cash advance ever a good idea?
It’s rarely a good idea to pay more in interest and fees than absolutely necessary, but there are times a cash advance ple:
- You’re in an emergency situation. Let’s say you’re driving through North Dakota and your transmission blows. You have no one to call for help and your credit is not high enough to take out a short-term loan. The only car repair shop in town does not accept credit cards. If you know you can pay the cash advance off quickly, it may make sense under the circumstances.
- It’s midweek and your employer owes you a check by Friday. Again, knowing you can pay the advance off quickly will insulate you from the full weight of paying a higher interest rate. You’ll still be out the fees and interest for the number of days you borrowed the money, but the loss won’t be catastrophic.
As a rule, it’s a good idea to avoid any loan that’s going to cost you more from the moment you accept the funds. To avoid the need to take out a cash advance, make it a point to build an emergency savings account. Even if you can only put a few dollars at a time into the account, you know you’re moving in the right direction.
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