What Is a Credit Card Cash Advance?
Credit cards come with some pretty powerful capabilities, and cash advances (also called funds advances) are one of them. If you're new to this type of transaction, or you just want to know the ins and outs, we have the info. Read on for answers to the most common questions, from “what is a cash advance?” to “how does a cash advance work?”
February 1, 2021 in Learn
What is the definition of a cash advance?
With a credit card funds advance, cardholders can withdraw a certain amount of money on their existing credit card account up to the allowable limit. Note that when you withdraw cash from a credit card, you are charged funds advance fee, a higher interest rate based on the funds advance rate applicable to that card, and you will start paying interest from the time you withdraw the cash.
Although a credit card cash withdrawal does come with additional fees, such as a higher interest rate (more on this later), it’s substantially less costly than getting a payday loan – a short term loan with high fees that allow someone to borrow up to $1,500 to be repaid from their next paycheque, usually at an extremely steep cost.
How does a cash advance work?
For a credit card cash withdrawal, it’s as easy as heading to your ATM (or bank teller), inputting your PIN and taking out the amount you need. The maximum sum you can borrow depends on your credit card, which may have a cash advance limit lower than your overall credit limit.
Although you might think of a cash advance as akin to using your credit card to “buy” cash (instead of buying goods and services), there’s a major difference to note: Regular purchases and cash advances are treated differently, with the latter subject to higher interest.
Glance through your monthly credit card statement, and you’ll notice an annual interest rate (AIR) that’s specific to purchases. You’ll also see a separate AIR, usually at least a couple of percentage points higher, that applies to cash advances. In addition, your transaction might entail an ATM or bank fee and also a separate cash advance fee (often a flat rate, like $10 per advance, or a percentage of the advance, like 3 percent).
You can pay back your cash advance in the same way you pay back your other credit card expenses. But it’s important to keep in mind that your purchases come with an interest-free grace period, and you don’t get this benefit with cash advances. That means as soon as the ATM dispenses your money, interest on your cash advance will start accruing daily — until you clear off your credit card balance in full.
What else do I need to know about credit card cash advances?
Compared to many other types of loans, a credit card cash withdrawal is generally a more expensive way to borrow money. So cash advances may not be the best solution in all cases, especially for people carrying a sizeable credit card balance and having difficulty making more than the minimum payment monthly. A minimum payment is usually allocated to the portion of your credit card balance with the lowest interest rate first (for example regular purchases charged to your card), then to balances with higher interest rate like cash advances.
Also, if you take out a hefty cash advance, that pushes up what’s known as your “credit utilization ratio” or “debt-to-credit ratio,” the percentage of your total credit limit you’re using. This, in turns, factors into your overall credit score. If you’re close to maxing out your credit card, for example, a potential new lender may wonder about your ability to handle more debt.
All that said, cash advances can be a helpful tool to cover the occasional shortfall, emergency or cash-only situation. When you require funds as soon as possible, a simple and speedy cash advance on your credit card is one of your most convenient options. To ensure you can access this feature when you want it, explore all American Express® Cards and find the best option that suits your financial needs.