How to minimize the cost of a cash advance

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When you’re short on funds but need money immediately, getting a cash advance from your credit card is a fast and convenient way to get the cash you need. Unfortunately, a cash advance comes at a hefty cost.

Before you use your credit card for an advance, it is helpful to know the steps you can take to minimize the costs of a cash advance.

How does a cash advance work?

A cash advance is essentially a cash loan from your credit card, with a maximum amount equal to your available credit. Typically, you get a cash advance from an ATM or through a bank that works with your credit card’s payment network (Visa, Mastercard, American Express or Discover).

While getting a cash advance is easy, it’s also quite expensive. Consider these factors which drive up the cost of a cash advance:

Transaction fees

No matter how you take out a cash advance, you will have to pay a transaction fee, typically 3 percent to 5 percent. Currently, the transaction fee for Chase Sapphire Preferred® Card is 5 percent or $10, whichever is higher. That means if you take out a cash advance for $300, the transaction fee will run you $15. Incidentally, the transaction fee is identical for three other top credit cardsDiscover it® Cash Back, Citi® Double Cash Card and Blue Cash Preferred® Card from American Express.

Higher APR

The APR for credit card cash advances tends to be substantially higher than the APR for regular purchases.

Consider this: The current average credit card interest rate is hovering around 16 percent. While your card’s APR for regular purchases may be higher or lower, one thing is certain: the average cash advance APR of 24.80 percent is considerably higher.
Before you get a cash advance, do your due diligence and run the numbers to understand your actual cost.

No grace period

Many responsible cardholders are surprised to learn that credit card companies do not allow a grace period for cash advances as they do for regular purchases. Instead, interest begins to mount the moment you take a cash advance.

How to get a cash advance from a credit card

To establish the cash advance option on your credit card, call your card issuer’s customer service department and get a PIN. You can then visit an ATM and use your card and PIN, just like a debit card, to get cash. The only difference at the ATM is you’ll select the cash advance option rather than choosing your savings or checking account. You’ll then enter the amount of cash you wish to withdraw.

Of course, you won’t be able to access more than your available credit line. In fact, credit card companies typically limit your daily cash advance amount to a few hundred dollars. In other words, if you need more than a few hundred dollars to address an emergency, a cash advance may not be a reliable option.

How to minimize the cost of a credit card cash advance

While transaction fees and high-interest rates spike the costs of a credit card cash advance, you still may want to consider one as a last-resort option to address an emergency financial situation. In that case, it’s helpful to understand how to limit the costs of a cash advance.

Borrow as little as possible

The ideal way to minimize cash advance costs is to borrow only the absolute minimum you need. The smaller your cash advance amount, the less you’ll have to pay in fees and interest. Remember, a cash advance is simply a loan from a bank. The best way to accelerate the process is to avoid taking out a considerable amount, to begin with.

Pay off your cash advance as fast as you can

Since your advance begins accruing interest the same day you get your cash, start repaying the amount you borrow as soon as possible.

If you take out a $200 cash advance, aim to pay that amount in full—or as much as possible—on top of your minimum payment. Make it a goal to repay the amount in days instead of weeks. And don’t even consider months. At 25 percent APR, a $1,000 cash advance will accrue interest of about 70 cents a day. If you can pay it off within a few weeks, the interest won’t have time to add up to much. But as time goes on, so will the mounting interest.

Your credit card statement should show you the different interest rates for your purchases, cash advances and balance transfers. Thankfully, the Credit CARD Act of 2009 requires credit card companies to apply payments made in excess of the minimum amount due to balances with the highest interest rates. Before the passing of this important consumer protection legislation, it had been common practice to apply payments over the minimum monthly amount to the lowest interest balances first, thereby extending the time necessary to repay higher interest rate balances.

How much does a cash advance cost?

You can use Bankrate’s credit card calculator to see the total cost of a cash advance as well as how different repayment strategies can change how much you’ll have to pay.

Let’s say you take out a $500 cash advance at 25 percent APR and pay a minimum payment of $15 each month. You’d pay that amount for 58 months (almost five years!) before the balance was paid in full. You would also pay $362 in interest, plus a $25 cash advance fee (5 percent) and an ATM fee, likely $3 or more. So in order to borrow $500 you would end up paying an additional $390.

That means the convenience of a cash advance would cost you 78 percent more than the original borrowed amount of $500 if you only pay the minimum payment. Doubling your monthly payment to $30 a month would have you paying off your debt in 21 months with $120 in total interest (24 percent more than the amount borrowed), while tripling it to $45 a month would take just 13 months and you’d only pay an additional $75 in interest (15 percent more).

This example highlights the importance of paying more than the minimum amount in order to minimize the cost of a cash advance. You can significantly reduce interest charges and your repayment timeline if you can make sizable payments over the minimum amount. If you are unable to pay more than the minimum, it may be best to save your money and avoid getting a cash advance.

Alternatives to a credit card cash advance

Before you turn to a costly cash advance, consider these options to meet your needs and save money.

Request an extension

Instead of getting a cash advance to pay a bill, you may be able to get your creditor to extend or change your due date. You may even be able to work out a payment plan to catch up on your account without affecting your credit. Many creditors even allow their customers to pause their accounts for an agreed number of weeks or months due to financial hardship.

It doesn’t hurt to talk to your creditors to discuss your options. You may just gain the flexibility you need to address an unplanned expense or emergency.

Friends and family

While borrowing money from a friend or family member can be a more flexible and less expensive option, this arrangement also carries the potential to damage your relationship with the person who agrees to loan you money. If you pursue this path, make sure you and the other person set clear terms before you accept any money.

Personal loan

Unless you have good credit, a personal loan could be an expensive option with high interest rates. Still, the interest rates and terms are typically much more favorable than a cash advance.

The bottom line

A cash advance should be a last resort because of its high interest, transaction fees and other factors. Consider other alternatives such as asking for an extension, getting a personal loan or seeking assistance from a friend or family member.

If you have few options and your best bet is to get a cash advance, you can minimize the financial impact by only withdrawing a small amount and repaying the balance as fast as possible.