Many credit cards offer cash advance loans as one of the features of the credit card. A cash advance loan is a loan to you made by the credit card company against the amount of available credit that you have left on the credit card. Therefore, if you have a $5,000 credit limit, but only $2,000 in available credit, your cash advance loan could be up to only $2,000. It is important to note that some credit card companies place a limit on cash advances that is separate and distinct from your credit limit. If you look at your monthly credit card statement, there should be a section that states your cash advance limit.
As you know, when you use your credit card, you purchase a particular product but receive no cash. The charge appears on your next statement and you can pay off your balance in full or over a course of time. However, with a cash advance, you go to your bank or an ATM and obtain cash from your credit card.
Pros of Cash Advances
(1) Quick Cash – Cash advances can be helpful in obtaining cash quickly. Having a way to access cash quickly in the event of an unforeseen expense or an emergency is extremely helpful and also offers peace of mind.
(2) Better Interest Rate than a Payday Loan – Cash advances are generally better than payday loans because the interest rate for a cash advance on your credit card is usually substantially less than the interest rate attached to a payday loan. Additionally, your credit card company may be more reputable and easier to contact than a payday loan store in the event that you have questions or need customer assistance.
(3) Unsecured Debt – Cash advances are credit card debt and thus, unsecured. Unlike payday loans (which may require a post-dated check) or home equity lines of credit (which loans are secured against your home and thus, should you not pay on the loan, you could lose your home), cash advances are not attached to or secured by anything. As such, your property is protected should you default on the loan.
Cons of Cash Advances
(1) Higher Interest Rate than Purchases – Cash advances generally carry a higher interest rate than credit card purchases. Look at your monthly statement to discover your cash advance interest rate. For example, your interest rate for purchases may be only 9.99% while your interest rates for cash advances may be 19.99% or higher.
(2) Considered Credit Card Debt and Affects Debt Ratio – A cash advance is considered credit card debt and counts against your credit limit on your credit card. Earlier I stated that some credit card companies give you a separate limit for cash advances, which is usually less than your actual credit card limit. For example, if your credit limit is $5,000, your cash advance limit may be only $1,500. However, both limits are affected by your available credit. Therefore, if you only have $500 of available credit on your card, you cannot get a $1,500 cash advance. You would, in this example, be able to get only a $500 cash advance. Back to the primary point, because the cash advance counts against your debt ratio, it will affect you credit score.
(3) There is Usually a Fee for a Cash Advance – You can get cash advances from ATM’s and banks. However, keep in mind that the fees can be expensive. The bank may charge you a fee for a cash advance and your credit card company may charge you an additional fee. ATM’s generally have the highest fees and are usually on a sliding scale. As such, the bigger the loan, the bigger the fee.
As stated above, cash advances can be very helpful in an emergency, but due to the higher interest rates and high fees, abusing cash advances can lead to many financial woes.