A cash advance is when you take out physical cash from a bank or ATM using your credit card. Though taking out physical cash with your credit card is possible, it is not what credit cards are intended for, and it is generally a bad idea to do so. Always use a debit card to withdraw money from an ATM if possible.
The interest rate on cash advances is often not the same as it is for making regular purchases with your credit card – the interest rates on cash advances are usually much higher. For example, your regular APR could be 12.99%, but your cash advance APR rate could be as high as 30%. Many borrowers are not aware of this, often racking up very high debts due to sky-high interest rates.
You will usually be immediately charged interest on cash advance transactions; this is because credit card cash advances have no grace period. A grace period is a period of time where you are not charged interest for any purchases you make with your credit card. A typical grace period is around 15 days or more, but a cash advance transaction has no grace period at all.
Normal credit card transactions leave you time with which to pay your balance off in full, avoiding any interest due to the grace period. However, cash advances result in interest accumulating on your balance immediately; as soon as the cash is posted to your account, you’re paying interest on it.
Cash advances also come with fees a lot of the time. These are usually between 3% and 5% depending on the lender. Therefore, if you had a 5% cash advance fee, taking out $100 at an ATM with your credit card would see you being charged $5 straight away. This is in addition to the interest that we just talked about. Therefore, taking out $100 with your credit card at an ATM now means that you owe $105 plus interest to your credit card company.
Many customers are not aware of the strings attached to credit card cash transactions, often making the easy mistake of assuming that they work like debit cards, or that they will simply be charged their regular APR rate after the grace period like normal. This has seen many credit card users ending up in large amounts of debt to their lenders, often taking years to get out of it.
If you’re going to take out cash at a bank or ATM, always use a debit card or other more appropriate means of doing so. Credit cards are not intended to be used to withdraw cash, and anyone doing so (for example, if they forget their debit card and need to pay for something in cash) should be aware of the risks of doing so. If you do use your credit card to withdraw cash, pay off the balance in full as soon as possible.