Credit Card Q & A: How Do Cash Advances on Credit Cards Work?

Question: How do cash advances on credit cards work?

Answer: If your credit card offers a cash advance option, you can get the advance by using your PIN at an ATM or by using a convenience check that’s sent to you by your issuer.

This might sound like an easy way to get a quick loan, but you’ll find this is a very expensive way to solve a cash flow problem. Here are the disadvantages:

Cash advance fee. You’ll be charged between 3-5 percent of your advance. So if you withdraw $2,000, you’ll pay up to $100 right off the bat to get the money.
Higher APR. The APR for a cash advance is much higher than your purchase APR. I’ve seen cash advance APRs that are higher than 25 percent.
No grace period. Typically, the interest expense clock starts as soon as you swipe your card at the ATM.

With a $2,000 cash advance, you’re looking at up to $100 in fees and then around $42 in interest expense if you pay it off in one month. So you end up paying around $142 to borrow $2,000 for one month.

Does getting a cash advance ever make sense? I suggest you explore every other possibility before getting a cash advance on your credit card. The only circumstances where this isn’t likely to become a financial disaster for you is if you’re in a dire emergency and you know you’ll be able to pay it back within the month.

Image: billaday, via Flickr.com