How to reduce the cost of a cash advance

If you already have a credit card, getting a cash advance is super easy.

But it can also get super expensive. Before you borrow money from your credit card, make sure you understand how a cash advance works, how to minimize cash advance fees, and if there are better alternatives.

How do cash advances work?

A cash advance is a way to borrow cash from your credit card company. You can initiate your cash advance online, through cash advance checks that come with your credit card statement, or through an ATM.

To withdraw money from an ATM using a cash advance, you need the PIN number associated with your credit card. You must then agree to all cash advance fees before you can receive your money. ATM fees may also apply.

If you arrange the cash advance online, you can have it deposited directly into your checking account via ACH transfer. You must agree to all cash advance fees before receiving your money this way as well.

Another way to withdraw a cash advance is through convenience checks, which your credit card issuer sends along with your bank statements. These can be delivered with each statement, every few months, or once a year upon renewal, depending on the credit card issuer. Once you sign and hand over the check, you agree to the terms of the cash advance.

Your cash advance limit is likely less than your credit card’s purchase limit. Check your records or contact your card issuer to find out your credit limit for a cash advance.

What Makes Credit Card Cash Advances So Expensive?

Cash advances are an extremely expensive way to borrow money—even more expensive than using your credit card to make a purchase. Cash advances come with additional transaction fees and higher APRs than regular credit card purchases. And, unlike credit card purchases, that APR starts right away.

transaction fees

The first expense to consider is the transaction fee. This fee is typically between 3% and 5%. Typically there is a minimum fee, which is somewhere around $10.

Let’s say you took out a $250 cash advance with a 3% transaction fee but a minimum transaction fee of $10. Three percent of $250 is $7.50, but that’s less than the minimum fee. So you’d be charged a $10 transaction fee — even though it’s more than 3%.

But if you take out a $1,500 cash advance, 3% would be $45. Since 3% is more than the $10 minimum transaction fee, you pay $45 in transaction fees.

High APR

Credit cards almost always have a high APR. But every card actually contains at least two APRS: one for purchases and another for cash withdrawals. The APR cash advance is almost always higher.

This is true even if you sign up for a card with an introductory 0% APR. This 0% rate typically lasts for a set period of time — say 12 months — and typically only applies to credit card purchases or wire transfers. It does not usually apply to the APR for cash advances.

Interest begins to accrue immediately

Not only do credit card cash advances come with a higher APR, but that interest starts accumulating immediately. For credit card purchases, if you clear your balance in full before the first due date after purchase, you will receive grace period and pay no interest.

Not so with cash advances. There is no grace period. You owe interest the moment the money comes out of the ATM (or is deposited into your bank account). Because the interest accumulates instantly, it becomes much more expensive to pay back much faster.

What is the average cost of a cash advance?

The cost of your credit card loan varies depending on how much you borrow. To simplify this analysis, let’s say you borrow $1,000. The average cash advance fees and interest rates for a cash advance are:

  • 3%-5% transaction fee
  • 24.99% APR

With a balance of $1,000, your transaction fee can range from $30 to $50. At an APR of 24.99%, if you pay off your balance on day 30, you’ll owe about $20.83 in interest. If it took just a month to repay the money, the total financing cost would be between $50.83 and $70.83.

The longer it takes to pay off debt, the more expensive it becomes. Credit card interest is typically calculated daily. That means what initially seems like a manageable dollar amount of interest can quickly spiral out of control.

How to reduce the cost of a cash advance

A credit card cash advance is an expensive form of borrowing that you should avoid if possible. But if you find yourself in a situation where you absolutely need one, there are a few ways to slow the bleeding. They’re simple concepts, but they may not be easy to implement.

Minimize how much you borrow

The fees and interest on your cash advance are a percentage of the amount you borrow. This means that one of the best ways to limit your interest and fees is to decrease the amount you borrow.

If you borrow this money to pay a down payment on a car loan So that you can drive to your place of work, you may not get the fanciest model vehicle. Instead, get something functional, secure, and affordable—no frills.

You could also try to negotiate the base price with the retailer, which should lower the amount for a deposit through the bank.

Anything you can do to lower the amount you borrow through a credit card cash advance is worth considering.

Pay off your cash advance as soon as possible

Just trying to get enough money for groceries before payday? Then make sure to pay back your cash advance as soon as your paycheck hits your account.

Since interest accumulates daily, each day you owe money will cause your total debt to increase significantly the longer it takes you to pay it back.

Alternatives to cash advances

If you need cash fast, there are other products that you might consider. Some are better than credit card cash advances – and some are worse.

Personal Loan vs. Cash Advance

Personal Loans If you have a good credit rating, they are usually cheaper than cash advances. Unsecured personal loans require no collateral, and you ideally want to get one with a fixed interest rate for predictable monthly payments.

If you have good to very good creditworthinessYou might expect these loans to come with one APR somewhere between 7% and 20%. However, if you have bad credit, interest rates can be even higher than cash advances.

Personal loans also sometimes come with processing fees, which are an additional fee but are also included in the cost of the APR. If you take out one of these loans, finding one with no prepayment penalty is ideal. If you pay off the loan early to save interest, you will not incur any additional costs.

Also, be wary of personal loans that come with balloon payments. With these loans, your monthly rate is lower at first, but you end up with a one-off payment. If you can’t afford the balloon payment, you’re back where you started – you need to borrow more money.

A downside to these loans is that they usually have terms of at least one year, although you can find some with shorter terms. Another problem is that if you only need to borrow a few hundred dollars, most financial institutions offer a minimum amount of between $500 and $1,000. So it can happen that you borrow more than you need.

In many cases, a personal loan is preferable to a cash advance. However, note that this may not be the case if you have bad credit or the interest rate you are being offered is over 20%. Run your own personal numbers carefully.

Payday Loan vs. Cash Advance

The advertised rate of payday loan Lender is rare in terms of APR. If it were, it would often be over 100%.

Different states have different laws governing exactly how much payday lenders can charge, but even so, a cash advance is dramatically cheaper than a payday loan.

Borrow money from family and friends vs. cash advance

If you are in financial distress, you can always turn to a family member or friend for help. Depending on your relationship and the amount of money, they can hold the debt informally or write out an official contract with or without interest.

Before you borrow money from family or friends, make sure you can afford to pay it back in the near future. If you cannot do this, it can damage your relationship. However, if you can find a cheap and realistic arrangement, there is a high probability that this method will be cheaper than taking out a cash advance.

Ask for assistance vs. cash advance

Do you take a cash advance to cover something like a utility bill? You may have a program available to help you avoid borrowing from your credit card company.

For utility bills in particular, there are usually two options: payment plans or nonprofit programs.

If your utility sets up a payment plan for you, they may be willing to spread your current balance over several months, making repayment more achievable than owing it all in one lump sum. They can also give you a schedule that estimates equal payments over the course of a year, so you don’t pay $20 for heating in July and $300 in January. Instead, you might end up with a more stable monthly bill of $150 or something along those lines.

If your utility company has a government, government, or nonprofit program associated with it, they may have funds to help people in economic difficulties. It may hurt your ego to apply for such a program but the level of interest and Capital it saves, they can give you a clean slate and help keep the lights going without running into prohibitive debt.

Pittsburgh-based author Brynne Conroy is founder of the blog Femme Frugality and author of The Feminist Financial Handbook. She writes regularly for The Penny Hoarder.

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