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