Using Your Credit Card for Cash? Bad Idea

Most credit cards give you the ability to withdraw cash from an ATM the same way you would with a check card, except the money detracts from your credit line instead of your bank account. When you’re in a pinch and you must have cash, a cash advance on your credit card may seem like the perfect solution. But, be careful because it’s an expensive one.

When you use your credit card for a cash advance, it won’t have the same terms as your purchases. In fact, the terms for cash advances are typically much less attractive than for purchases and sometimes even balance transfers.

For one, the cash advance limit might be much lower than your limit for making purchases or transferring balances. So, you’d only be able to take out a fraction your credit limit as cash.

Cash advances typically come with a fee, 3-4% of the transaction amount, or a minimum of $5 to $10 whichever is greater. On top of the cash advance fee, you’ll also pay a fee to the ATM operator, similar to what you’d pay if you used your ATM card to withdraw cash from another bank’s ATM.

Cash advance rates are typically different from purchases rates and often above 20%, meaning you’ll pay more interest on a cash transaction than you would a purchase of the same amount. And you don’t get a grace period with the cash advance, even if you begin the billing cycle with a zero balance. You start accruing interest the same day you take out the advance.

Let’s say you have a credit card with a 24.9% cash advance APR that charges a $5 or 4% cash advance fee. If you take out a $250 cash advance, you’ll immediately incur a $12.50 charge - $10 cash advance fee and a $2.50 ATM fee. If you take the full billing cycle to pay back your advance, you’ll be charged $4.28 in interest. That’s a total of $16.78 to borrow $250 in cash. Of course, if it takes you longer to repay the balance, you’ll end up paying much more in interest.

Besides being expensive, cash advances are hard to pay back especially when you have one on the same card as another type of balance with a different interest rate. You see, when you make a payment on a card with more than one type of balance, the card issuer puts only the minimum toward the balance with the highest interest rate (typically the cash advance) and the rest of the payment goes toward the balance with the lowest interest rate. So, you may not reduce your cash advance balance as soon as you’d expect.

Use cash advances with extreme caution. Check your available cash advance balance and make sure you have enough available credit. Use a credit card that doesn’t have a balance. That way, there’s no confusion about how your payment is applied. Calculate the fees you’ll have to pay, so you’re aware of the cost. Then, pay back the cash advance as soon as possible to reduce the amount of interest you have to pay, the sooner the better. You don’t have to wait until your statement comes to make a payment and it’s cheaper if you don’t.