Taking out a cash advance from your credit card when you need cash is perfectly reasonable, as long as you repay your advance promptly, lest it damages your credit score.
It’s important to note that despite their convenience, cash advances aren’t the most affordable loan options. In fact, they’re quite pricey due to high interest rates, annual percentage rates (APRs), and fees. In this article, we’ll discuss what credit card cash advance fees are, how these types of loans work, what their overall cost is, and how you can lower your fees.
What Is a Cash Advance Fee?
A cash advance fee is a cumulative charge of those fees that the credit card issuer levies when you withdraw a cash advance. This is the primary cost associated with withdrawing cash through your credit card, and it usually comes in the form of a percentage of the transaction or a flat fee; whichever is greater at the moment.
In most cases, the companies will either charge $5 to $10 or 3% to 5% from the withdrawn amount as a fee for taking out a cash advance. However, it’s relatively common for credit card companies to structure their cash advance fees so that the charged fee is greater than a percentage of the minimum flat fee.
Suppose your credit card company charges 5% on the cash advance withdrawal. If you take out $100, the charge would be only $5. However, since this is below the minimum flat rate of $10, you’ll be charged the appropriate amount of $10.
However, suppose you withdrew $300. In that case, the 5% charge would amount to $15, which is greater than the aforementioned $10 minimum flat rate, so you’ll be charged $15 for taking out a cash advance.
While this fee structure is designed by the lender to discourage small transactions and make them less attractive to borrowers, it’s hardly the biggest cost of a cash advance. To understand how cash advance fees work, it’s important to know the mechanics behind cash advances.
How Does Credit Card Cash Advance Work?
A cash advance is a short-term loan that allows you to borrow funds from your credit card by simply borrowing against your available credit, though some credit card providers offer separate cash advance limits.
In a typical credit card transaction, the consumer pays for goods and services using a credit card. However, you may wonder what happens behind plastic and POS terminals is that the goods or services are paid for by you by the credit card company, which then bills you for the transaction. There’s no physical cash involved in regular purchases using a credit card.
However, cash advances allow you to withdraw cash from your ATM or from the branch office, which you can then use as a personal loan in terms of flexibility and use. When you take out a cash advance, you’re immediately charged with the aforementioned cash advance fee. If you withdraw the amount from your ATM, you can also expect an ATM fee.
Typical credit card transactions often imply a grace period, during which you don’t have any interest if you pay your debt entirely. That does not happen with cash advances; instead, the interest accrues from the moment you withdraw the cash, with no grace period.
All you have to do now is repay your cash advance. However, payments made towards your credit card balance are often applied to balances with the lowest interest rates. This is important to note because cash advances come with high interest rates, which are usually significantly higher than the interest associated with balance transfers.
This means that the interest will continue to compound until you have paid your credit card debt entirely, including balance transfers and the cash advance, to avoid accruing more interest than necessary, especially since the interest compounds.
How Much Does a Cash Advance Fee Cost?
While we previously mentioned cash advance fees and ATM withdrawal fees, it’s important to note that those aren’t actually the only fees associated with cash advances.
Suppose you want to withdraw a $300 cash advance from your credit card account at an ATM. The immediate debt you incur is $300, which you withdrew, plus an additional $15, assuming that the cardholder charges a 5% cash advance fee. This adds to your debt, which is now sitting at $315 total.
However, you withdrew money from an ATM, so the ATM fee also applies to the principal amount. That’s an additional $4.50, assuming that the ATM fee is 1.5% of the withdrawn amount. This brings your total cash advance debt to $319.50. However, unlike balance transfers and credit card purchases, cash advances don’t provide any grace periods, so a cash advance APR applies immediately, incurring interest.
Cash Advance APR usually ranges from 25% to 30% of the principal, and it is usually calculated daily based on your daily balance. Let’s assume that, for this discussion, the APR is 30%. On $319.50, that’s an additional $0.26 in interest.
However, for most credit card cash advances, the interest compounds, which means that the interest accrued each day is added to the principal balance, and the future interest is then calculated based on the new, higher balance.
Cash advances don’t have specified repayment terms, which allow you to repay the advance when you have the funds to do so. However, due to the higher APR and higher interest rates, you’ll have to repay a total of $327.47 after 30 days. The real cost of your loan is $27.47 on a 30-day repayment period.
To put the costs in better perspective, for a $1,000 cash advance amount taken over six months, you’ll have to pay back approximately $1234.74. Paying back in monthly payments provides marginal relief from high interest charges.
How to Lower Your Cash Advance Fees
Lowering your cash advance fees is very beneficial in managing the overall costs, but it does come with certain drawbacks. One of the best ways to lower your cash advance fees is to find a credit card that offers lower fees for cash advances.
Additionally, withdrawing only the amount you need will also incur lower percentage fees and reduce the amount of interest you’ll have to pay. Since the interest starts accruing from day one, it’s really important to repay the cash advance as quickly as possible. This is also one of the more effective ways to reduce cash advance costs.
Lastly, suppose you’re a long-time customer with a good credit history and low credit utilization. In that case, you can try to negotiate lower interest rates on the fees associated with such loans. In the end, if you find that cash advances are too expensive, try some alternative loan products.
Viable Alternatives
If you need quick cash, there are several viable alternatives to cash advances that might be less strenuous to your personal finances and your credit utilization.
- Private loans: Instead of withdrawing a cash advance, try borrowing the necessary amount of cash from your friends or family. They’re more likely to lend you money with lower interest or no interest at all, which makes these loans significantly more affordable than cash advances.
- Personal loans: Personal loans encompass a wide range of loan products that are either secured or unsecured, and some of them don’t even imply a credit check. Your FICO score still plays a crucial role in determining your eligibility for the loan, as well as helping lenders determine the most appropriate interest rates and repayment terms based on your credit report.
- Lines of credit: Lines of credit are flexible loans granted by traditional financial institutions that grant you access to a certain amount, which works just like cash advances, but they usually come at lower interest rates. They also have draw and repayment periods and are pretty flexible in terms of their use.
- Payday alternative loans: PALs are offered by credit unions to bad-credit borrowers as an alternative to costly payday loans, which usually have an APR of up to 400%. PALs, on the other hand, are capped on both fees and interest that can be charged, which makes them really affordable.
Summary
Cash advances are a good financial solution that can help you cover smaller expenses, like covering your rent and smaller emergencies, as well as covering other financial requirements outside large expenditures. However, they can be quite pricey, which is why we suggested alternative borrowing options.
If you’re in the market for a personal loan, US Cash Advance has your back; simply visit our website, fill out an application form, and we’ll share your application with the trustworthy lenders in our network. Once your application has been reviewed, you’ll receive loan offers from our lenders, allowing you to choose the one that best fits your financial needs.