When you need money that you don’t have, you might not always stop to think about the best ways to get it. If your need is great, you can take a cash advance on a credit card, for example, without considering the interest on the cash advance and how you’re going to pay it back. Here’s an overview of how cash advance interest works and how to minimize it.
Key points to remember
- Credit card companies treat cash advances differently from regular credit card purchases.
- Credit card companies charge fees on cash advances.
- Using a credit card for cash results in a higher interest rate than using a card for purchases.
- Consumers should take the time to read the terms of a cash advance before purchasing one.
What is a credit card cash advance?
A cash advance is a way to get immediate funds through your credit card. It’s no different from a payday loan, only the funds are advanced not against your paycheck, but against your card’s line of credit. In a sense, a cash advance acts like any other purchase made with a credit card, but instead of buying goods or services, you are âbuyingâ cash.
What a lot of people don’t understand about cash advances is that your credit card handles them differently than the way it handles credit on purchases. Taking a cash advance is not the same as using your card for products or services.
Among other things, the interest rate for cash advances may be higher and there may be transaction fees. A cash advance can still make sense compared to other ways to get a quick loan, like a payday loan, which needs to be paid off, usually on your next paycheck.
How to get a cash advance from a credit card
Cardholders get a cash advance by going to an ATM, bank, or other financial institution, or by requesting a check from the credit card company. In fact, some card issuers periodically mail checks to encourage consumers to get a cash advance on their cards. Check your credit card terms to find out your cash advance limit and how much credit you have for a cash advance.
If the card company asks you to make a cash advance, what’s wrong? You probably already know the overall answer to this question. But the devil is in the details, and you need to fully understand what you’re getting into before exercising your cash advance option.
Credit card cash advances vs. regular purchases
Credit card companies like cash advances in part because they treat interest on cash advances differently from interest on card purchases. There are different terms for credit card purchases compared to cash advances. On the one hand, the interest rate is often higher on a cash advance by several percentage points,
Additionally, any special interest rate promotions on the card, such as no interest until a certain date, may not apply to cash advances, which means you could be affected. unexpectedly.
Unlike regular purchases, there is no grace period on cash advances. Interest begins to accrue from the date of the transaction.
In addition to charging a higher interest rate than normal, credit card companies also automatically charge a transaction fee on the amount advanced, say 3% to 5%, or a flat rate of, say, 10. $, whichever is greater. Additionally, cash advances are generally not eligible for rewards, cash back programs, or any other credit card benefits. Your cash advance line is almost always considered separate from the rest of your credit balance.
You can find out the details of your particular card on its website or on the documents that were given to you when you registered. If this is a special offer, this is the part you need to check out.
How does credit card interest work with a cash advance?
As noted above, the interest charges on a cash advance are different from those on a purchase. Not only is the rate generally higher for a cash advance, there is no grace period, meaning that interest starts accruing from the date of the transaction. And you’ll pay interest on your cash advance even if you pay it off in full and your balance is zero for that bill cycle.
You also have the option of repaying the cash advance over time, as you can with a purchase, provided you make minimum monthly payments.
How your payments are applied
Thanks to the Credit Cards Act of 2009, credit card payments above the minimum payment amount are made first for higher interest purchases. This was a major change in the way credit card companies can apply payments (previously companies could apply payments to low-interest purchases).
Suppose you have a $ 5,000 balance on a card with a special annual percentage rate (APR) of 10% that you plan to pay off in 15 months, and while you do, you take out a cash advance of 500. $ which generates 22.5%. in interest. Depending on the amount of the payment you make, it may be split between your balances.
If you only make the required minimum monthly payment, it will likely be applied to the $ 5,000 balance at the discretion of the credit card issuer. Since you already have a balance on your credit card, you will need to pay more than the minimum to pay off the cash advance faster.
Better to just use the credit card itself
Instead of taking a cash advance, try using the credit card itself. If there is something that needs to be paid that you absolutely cannot use a credit card to do, take as small a cash advance as possible to reduce interest charges and make sure you pay your money. balance as quickly as possible.
The bottom line
Like balance transfers, cash advances can be a good resource in certain circumstances. However, it is important that consumers understand the terms of the agreement, including interest rates and one-off charges, before proceeding with these transactions. Your high interest cash advance loan could last a very long time if you don’t manage it properly.