Understanding Cash Advances From Credit Cards

by Jason Steele on March 19, 2012

Most credit card transactions are used to make purchases from merchants that accept them as method of payment. Alternatively, credit card users may have the need to make payments to companies and individuals that do not accept credit cards. In these instances, customers may be tempted to use their credit cards for a cash advance.

How A Credit Card Cash Advance Works

Credit cards can be used at ATMs in order to receive cash. To be clear, the customer is borrowing money, not making a withdrawal.  Unlike a standard purchase, customers will need to supply a personal identification number (PIN) in order to complete the transaction. Beyond the necessity of a PIN, the terms of a cash advance are also very different than a standard purchase. With Purchases, cardholders can pay off their entire balance before the due date in order to avoid interest. The time period between the purchase and the statement due date is called a grace period.

With a cash advance, there is no grace period, and interest begins accruing immediately upon receiving the cash. Furthermore, most credit cards specify a much higher interest rate for cash advances than they do for purchases or balance transfers. In addition, cash advances are typically subjected to cash advance fee, which is often 3%-5% of the amount received, with a minimum of $10 per transaction. Finally, cash advances are also subject to any foreign transaction fees, which are often another 3%.

An Example

Imagine a credit card user visiting  a casino in the Bahamas and wishes to borrow $100 from his credit card account as a cash advance. A popular credit card, like the Chase Sapphire, will charge a minimum of $10 as a cash advance fee, plus another $3 as a foreign transaction fee. Finally, the cash advance APR of 19.24% will apply immediately. Even if the cardholder receives his statement five days later, and pays the balance in full by the due date, 25 days later, he will still owe interest on the amount borrowed for the entire 30 days. By the time the payment is made, more interest will have been incurred since the statement was generated, and even more interest will be listed on the cardholder’s next statement. When all of the cash advance fees, foreign transaction fees, and the higher cash advance APR is accounted for, the borrower will have received a short term loan with the equivalent of a three digit APR.

Alternatives To Credit Card Cash Advances

Considering all the interest and fees incurred, nearly any other type of borrowing, short of a pay day loan, will be less expensive. Card holders who are paying debts to individuals should consider some of the new and existing personal payment systems available that can be funded from credit card transactions as purchases. The systems include Paypal, Amazon Payments, and SquareUp. Some companies may also accept these methods payment for their goods and services.

Cash advances from credit card are a costly way to receive a loan. Before borrowing money from their credit cards, customers should fully understand the rates and fees that will be incurred, as well as some of the alternatives.

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