What is a cash advance?
It helps you if you need cash urgently
A cash advance can help you if you need money quick, but it has it's own catches.
Have you ever found yourself strapped for cash for your daily expenses? Many people have been there.
Sometimes you need to have “raw cash” to make necessary and immediate payments. For example, you could find yourself in a cash-only situation when you’re trying to make a purchase at a shop that doesn’t utilize a point-of-sale machine.
What to do?
Thankfully, financial institutions and credit card companies provide cash advances. A cash advance makes it possible for you to obtain a short-term loan at a bank in person, at an ATM, online, or via convenience checks. You can then use that cash to cover your urgent purchase.
What you need to know about cash advances
Cash advances are helpful if you ever find yourself in a tight corner. However, before you go cash-advance crazy, there are a few things you’ll need to understand about them.
For one, you have to pay the cash advance back to the lender. It’s a short-term loan and counts as utilization of your credit card even though it involves paper money. Think of it as taking actual cash out of your credit card to pay for non-card-friendly products and services.
However, a cash advance is usually limited to an amount much lower than the credit limit on your card. You won’t be able to utilize 100% of your card limit with a cash advance.
Another thing: Cash advances come with different kinds of interest payments and other steep fees. This is a major downside to taking a cash advance. The fees your card issuer attaches to your cash advance could be either a flat fee or a percentage of the amount advanced.
There are also bank or ATM fees involved in this kind of transaction. Additionally, you have to pay interest, which starts accruing instantly and is much higher than the regular rate associated with your credit card.
Effect of a cash advance on your credit score
Cash advances don’t directly damage your credit health because they don’t show up on your credit report.
However, the cash advance balance counts as your credit card debt. If it increases your credit utilization ratio, it can cause your credit score to drop. Also, if you fail to repay the debt on time, it will count as a default in payment, which will affect your payment history.
While cash advances might seem attractive, just bear in mind that the high interest rates and fees that come with them warrant a second look into your options. Only use cash advances in cases of emergency.
If the need isn’t pressing, it might be better to consider options such as:
- Borrowing cash from someone you can just pay back later
- Taking out a personal loan
- Payday loans
- Taking an overdraft from your account
- Car title loans
- Using the credit card directly if possible
Since anyone can run into a financial pinch at any time, everyone needs to know what the various forms of available assistance are, just in case. Check out our post on personal loans and cash advances to find out which better suits your needs.
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