Why you should avoid getting cash from a credit card at the ATM

You may already be familiar with the concept of withdrawing cash from your credit card at the ATM, also known as a cash advance. Maybe your friend or family member recently clued you in to this “quick hack,” or you’ve completed one yourself a time or two. Although it’s true — you can withdraw cash from your credit card at an ATM — it’s a process best to be avoided at all costs. 

Here’s why.

How does a cash advance work in the first place?

A cash advance is a transaction that allows you to withdraw money from a credit card. Essentially, you use your credit card to purchase cash. Therefore, the money you withdraw during a cash advance becomes part of your credit card balance.

Requesting a cash advance at an ATM will cost you. You will have to pay a cash advance fee at the ATM (usually 3% to 5%), plus pay a higher interest rate on any cash you withdraw. In most cases, the cash advance interest rate is based on a certain percentage plus the Prime Rate, and can reach as high as 30%. There also isn’t any grace period during which you can pay off your balance without getting charged interest. 

In short: That cash advance APR will kick in immediately.

Why you should reconsider taking a cash advance

There may be an instance where you need to take out a cash advance due to an emergency, but despite whatever reason is luring you to an ATM with your credit card, develop a plan to pay off cash advances as quickly as possible. 

In all other instances, cash advances should be reconsidered.

Cash advance fees

Your bank will charge you a cash advance fee every time you use a credit card at the ATM. Since ATM fees are already higher than ever, paying an additional cash advance fee on your ATM transaction is an extra expense you don’t need. The exact fee you will be charged varies by issuer, although it often falls between 3% to 5% of the transaction amount.

Cardholders can find this information in their card’s terms and conditions. Be sure to read those carefully before accepting your fate with a cash advance withdrawal.

High interest rates

Cash advance interest rates can be much higher than the interest rate your credit card issuer charges for purchases — sometimes up to 30% or higher, depending on the card and Prime Rate. Since cash advances don’t come with grace periods, that interest starts accruing right away. 

Interest charges on a cash advance can seriously add to your debt, especially if you carry a balance on your credit card from month to month.

Negative effects on credit scores

Another serious drawback of a cash advance has to do with your credit score. Taking out a cash advance will lower your available credit, so be prepared for your credit score to go down. In other words, if the balance is not paid off and interest begins to accrue immediately, your credit utilization rate will go up and your credit score will go down. 

You can also expect lenders to view you as more of a credit risk, since people generally only request cash advances when they don’t have enough money in their checking account to cover an expense that requires cash.

Alternative options to a cash advance

If you need cash but don’t want to pay the extra expenses associated with a cash advance, you have a few options:

• Withdraw from a debit card. If you have a debit card, you can withdraw money from an ATM without having to pay a cash advance fee, as long as you use an ATM in your bank’s network. 
• Consider a personal loan. If you need cash quickly but don’t want to deal with the high cost of a cash advance, a personal loan can get you the money you need at a much more reasonable interest rate. When you take out a personal loan, you’ll receive a lump sum of money.
• Ask friends and family for help. It’s not ideal, but in tight situations, sometimes the best option is to ask for temporary support you plan to repay.

The bottom line

Remember, a cash advance should always be viewed as a last resort. It is important to exhaust all of your other options before you decide to get cash from a credit card at an ATM, such as using a debit card, a personal loan or asking a trusted friend for help. 

Interest rates for cash advances tend to run higher than for regular purchases, so keep in mind the financial consequences if you are not able to pay off your account balance quickly.