Table of Contents
- What Is a Cash Advance?
- Key Takeaways
- Types of Cash Advances
- Tip for Avoiding Cash Advances
- Do Cash Advances Impact Your Credit Score?
- Cash Advance Pros and Cons
- Is a Cash Advance a Good Solution for Emergency Funding?
- What Is the Limit on a Cash Advance?
- What Is the Difference Between a Credit Card Purchase and a Cash Advance?
- The Bottom Line
What Is a Cash Advance?
Let me tell you directly: a cash advance is essentially a short-term loan you can get against your credit card's available limit. It's a way to get quick cash from sources like banks, credit cards, lending apps, or others, but I have to warn you, they come with high interest rates and fees that can add up fast.
Key Takeaways
Understand this: a cash advance is a small, short-term loan that usually hits you with high interest and fees. Many credit card issuers let you borrow against your credit line this way. There are apps dedicated to cash advances too. Other forms include merchant cash advances, payday loans, and payday alternative loans. And yes, taking one can hurt your credit score by boosting your credit utilization ratio.
Types of Cash Advances
Cash advances aren't all the same; they vary in form and cost, so pay attention to which one you're considering. The most common is the credit card cash advance, where you borrow against your card's credit line. You can pull the money from an ATM or use a convenience check to deposit or cash at a bank. These carry a higher interest rate than regular purchases, and interest starts accruing right away—no grace period here. Plus, there's often a fee, either flat or a percentage of the amount, and ATM usage might add another small charge.
Credit card companies keep cash advances separate from purchases on your statement, with different balances. If you only pay the minimum, the issuer can apply it to the lower-interest balance first, leaving your cash advance to rack up interest at its higher rate for longer. But if you pay more than the minimum, that extra goes to the highest-interest balance first, which helps reduce debt quicker. These advances don't usually get introductory low rates, but they're fast to get in an emergency.
Then there are cash advance apps like Varo, Payactiv, MoneyLion, Dave, EarnIn, and Empower. They offer small advances, up to $1,000 or so, that you repay in a short time, like 30 days or by your next paycheck. Their rates can exceed 100% APR, and fees might apply, but they're often cheaper than payday loans.
For businesses, merchant cash advances provide quick funds repaid from daily credit and debit card receipts—more like an advance on future sales than a loan, and easier to get than traditional business loans. In consumer terms, cash advances can mean payday loans from online or storefront lenders, based on your next paycheck, capped at $500 or less, with APRs up to 400%. These are restricted or banned in many states for good reason.
Some banks and credit unions offer payday alternative loans, which are small, short-term with better rates, from $200 to $1,000, repaid in months. Employers might provide advances on paychecks without fees or interest, sometimes through apps like Payactiv.
Tip for Avoiding Cash Advances
Here's a straightforward tip: instead of relying on expensive cash advances, build an emergency fund in a liquid account you can tap when needed.
Do Cash Advances Impact Your Credit Score?
Taking a cash advance can affect your credit score, and not in a good way. If it's from a credit card, it increases your balance and thus your credit utilization ratio, which scoring models use to calculate your score. For instance, owing $500 on a $1,500 limit gives you 33% utilization, but adding a $300 advance jumps it to over 53%—and ideally, you want it under 30%.
If your limits are higher, like the average $29,855 in late 2023 per Experian, a small advance won't hurt as much. The real damage comes if interest piles up and you can't repay, leading to bigger problems.
Cash Advance Pros and Cons
A cash advance can make sense for emergency cash if you have no other options and a solid repayment plan, especially avoiding things like payday loans. But steer clear in these cases: right before bankruptcy, as it could be seen as fraudulent and not forgiven; to pay another credit card bill, which just digs you deeper; or to buy something you can't afford, which is never smart.
Is a Cash Advance a Good Solution for Emergency Funding?
With their high rates and fees, cash advances aren't ideal, so look for alternatives first. In a pinch, they're quick, but ensure you can pay back fast.
What Is the Limit on a Cash Advance?
Your card issuer sets the cash advance limit, often a percentage of your total credit limit—like 30% of $10,000 allowing $3,000. There might also be daily limits, say a few hundred dollars.
What Is the Difference Between a Credit Card Purchase and a Cash Advance?
The key difference is that cash advances start accruing interest immediately, with no grace period, plus fees and higher rates. Purchases might have a grace period, and rates are lower—for example, 21.49% to 28.49% on purchases versus 29.99% on advances for some cards.
The Bottom Line
Cash advances offer a quick fix for cash emergencies, but if you need them often, it's time to rethink your budget and spending habits.
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