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What is a cash advance and should I use it?

Curious about Credit Cards

What is a cash advance and should I use it?

A cash advance is a financial service offered by credit card issuers that allows you to withdraw cash from your credit card, typically from an ATM or by visiting a bank or financial institution. While it can be a convenient option in emergencies, there are several important considerations and potential drawbacks to using a cash advance:

Pros of Cash Advances:
1. Convenience: Cash advances provide quick access to cash when you don't have other options available.

2. Emergency Situations: They can be useful in urgent situations when you need cash for unexpected expenses, such as medical bills or car repairs.

Cons of Cash Advances:
1. High Fees: Cash advances are expensive. Credit card companies often charge cash advance fees, which can be a percentage of the amount withdrawn or a flat fee, in addition to ATM fees if you use an ATM that doesn't belong to your card issuer.

2. High Interest Rates: Cash advances typically have a higher interest rate than regular credit card purchases. Interest begins accruing immediately, with no grace period, which means you start paying interest from the moment you take the cash advance.

3. Impact on Credit Score: Cash advances can negatively affect your credit utilization ratio (the amount of credit you're using compared to your credit limit), which is a significant factor in your credit score. High credit utilization can lower your credit score.

4. No Reward Points: Most credit cards do not offer rewards or cashback for cash advance transactions, so you miss out on potential benefits.

5. Debt Trap: Because of the high costs associated with cash advances, relying on them frequently can lead to a cycle of debt, making it challenging to pay off your credit card balance.

Given the drawbacks, it's advisable to explore alternatives before resorting to a cash advance:

1. Emergency Fund: Having an emergency fund can help you cover unexpected expenses without resorting to highcost cash advances.

2. Credit Card Purchases: If possible, use your credit card for purchases instead of cash advances. Pay off the balance in full to avoid interest charges.

3. Personal Loan: Consider applying for a personal loan, which may offer more favorable terms compared to a cash advance, especially if you need a larger amount of money.

4. Negotiate with Creditors: If you're facing financial difficulties, reach out to your creditors to discuss payment options or hardship programs. They may be willing to work with you.

In general, cash advances should be used as a last resort when you have no other options for accessing cash. If you do use a cash advance, prioritize paying it off as quickly as possible to minimize interest charges and their impact on your financial wellbeing.

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