What Is a Cash Advance?

By | 2017-12-01T02:36:52+00:00 December 1st, 2017|Credit|0 Comments

Let’s talk about the cash advance feature on a credit card. I’ve never really been a fan of them, and I’m definitely not alone in this. I’ll explain why, but first let’s just talk about the basics.

So, a cash advance is a financial transaction that you can conduct with a credit card. In a nut shell, a cash advance involves swiping your credit card and withdrawing cash. You can do the same thing with a debit card, but just replace that plastic with its credit card counterpart and voila, you have a cash advance.

You can perform a cash advance over the counter at a bank or at an ATM, and you can withdraw as much cash as you need, so long as it doesn’t exceed your credit card limit. After withdrawing cash with your credit card, the cash amount can be seen on your credit card balance, so you’re on the hook for paying it back later.

“Cash advance” is just a euphemism for borrowing cash. Except it’s a bit different than simply “borrowing some cash.” When you decide to borrow cash from your credit card provider, they expect quite a bit in return.

With that, I’ll remind you that I don’t like cash advances. In some cases, you might be in a pinch to withdraw cash with a credit card, but you should avoid them at all costs. Here’s why.

Normally, when you borrow cash from a friend, there isn’t much pressure to pay him or her back. At the very worst, maybe you’ll buy them a beer later, or you’ll get the cash later and pay them when it’s convenient. Maybe later, you’ll hook them up with some cash. It all evens out, and everyone is happy.

Not with a cash advance!

Your credit card issuer charges you extra for the privilege of withdrawing cash, and they do it more than once.

For starters, they’ll charge you a fee, known as the cash advance fee, for simply doing it in the first place. These fees can go one of two ways: either a flat fee of $5 or $10 or a rate of 5 or 10 percent depending on your card. You’ll be charged the flat fee that turns out to be greater than the rate fee, but if the rate fee is greater, that’s the one that gets put into play. (e.g. a $50 cash advance would get charged $5 – flat fee, but a $200 cash advance would get charged $10 – 5 percent)

That’s just one fee!

Credit cards come with a cash advance APR, so if you take out $100 on credit, then you’re on the hook for around 25 percent on average. This will start accruing daily and immediately, so if you let the balance sit around, you’ll be getting charged more and more. You should pay it off ASAP.

At this point, I hope you can see why I’d be against cash advances. In my opinion, the credit card companies don’t want you taking out cash, so they’re going to gouge you for what it’s worth.

Aside from that, I can’t be too mad at the credit card issuers. They have a right to set their own terms. You agreed to them in the first place. It’s their cash anyway, and they already loan out money by the billions virtually.

But I still don’t like cash advances!

I’m a proponent of paying for things only if you have the money on hand. My philosophy is if you need cash, then you should be able to withdraw it using your debit account. Even if I have to pay for something by swiping on credit, I usually make sure that I have the funds to pay for that right away.

Of course, this general logic is put to the test in medical emergencies and other tough scenarios, but a cash advance isn’t justified in most of these scenarios anyway. A cash advance should be reserved for strange, unexpected, outlandish scenarios that require cash when you’re unlucky enough to be super short on it in your own bank account.

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