4 min read

what is a cash advance line of credit

Written By

Clay Shiffman

A cash advance line of credit is a financial tool that provides individuals with access to quick cash when needed. Unlike traditional loans, which offer a lump sum of money upfront, a cash advance line of credit allows borrowers to withdraw funds up to a predetermined credit limit as needed.

This flexible borrowing option can be handy for covering unexpected expenses or managing cash flow fluctuations. However, it's essential to understand how cash advances work, including their costs and terms, before utilizing this financial product.

What's a cash advance?

A cash advance is a service provided by credit card issuers and some financial institutions that allows you to withdraw cash, either by using your credit card at an ATM or over the counter. This withdrawal is typically limited to a certain percentage of the cardholder's credit limit and often comes with additional fees and a higher interest rate than regular purchases. It's essentially borrowing cash against your credit card's line of credit and is generally considered a more expensive form of borrowing due to the associated fees and interest rates.

How does a credit card cash advance work?

There are a few steps involved in a cash advance.

Requesting a cash advance

You can typically request a cash advance from your credit card issuer through various channels, such as using an ATM, visiting a bank, or sometimes online or over the phone. Before requesting the cash advance, review your credit card's terms and conditions to understand the fees, limits, and interest rates associated with cash advances. It can help you make an informed decision.

Authenticate your identity

You may need to authenticate your identity depending on what you choose. For example, if you're withdrawing cash from an ATM, you'll typically need to use your credit card and enter your PIN. If you're requesting a cash advance online or over the phone, the credit card issuer may ask for your personal information to verify your identity.

Specify the cash advance amount

Decide how much cash you want to withdraw as a cash advance. Remember that there may be limits on the amount you can withdraw, either as a fixed amount or as a percentage of your credit limit.

Confirm the cash advance transaction

Once you're ready, confirm the cash advance transaction. If you're using an ATM or visiting a bank branch, follow the on-screen prompts or provide instructions to the bank representative. If you're requesting a cash advance online or over the phone, provide the necessary information to complete the transaction.

Receive the cash advance

If your request is approved, you'll receive the cash from the ATM, the bank teller, or through another designated method, depending on how you initiated the transaction.

Keep important documentation

Keep records of the cash advance transaction, including any receipts or confirmation numbers, for your records.

Things to consider when taking cash advances on your card

Taking a cash advance on your credit card can be convenient in certain situations, but it's essential to consider several factors.

Cash advance fees

Cash advances often come with upfront fees typically calculated as a percentage of the amount withdrawn. Additionally, you may incur ATM fees if you use an ATM to withdraw the cash. Ensure you understand the cash advance fee and other applicable charges, as they can add up quickly.

Interest rates

Cash advances usually have higher interest rates than regular credit card purchases, and interest starts accruing immediately, with no grace period. You'll end up paying more interest charges, especially if you carry the cash advance balance for an extended period.

Cash advance limits

There are often limits on how much cash you can withdraw as a cash advance. These limits may be a fixed amount or a percentage of your credit limit. Be aware of these limits to avoid unexpected restrictions when requesting a cash advance.

Impact on your credit score

While a cash advance doesn't directly impact your credit score, it can indirectly affect it. Carrying a high balance relative to your credit limit (high utilization) can lower your credit score. Additionally, missing payments on your cash advance balance can further harm your credit score.

Repayment history

Credit card payments typically go toward paying off balances with the lowest interest rates first. If you have both a regular and a cash advance balance on your card, payments you make will generally go toward paying off the regular balance first, leaving the cash advance balance to accrue more interest.

Cash advance alternatives

Consider alternative options before resorting to a cash advance. Depending on your situation, other forms of borrowing, such as personal loans or lines of credit, may offer more favourable terms and lower costs.

Emergency fund

Building an emergency fund can help you avoid the need for cash advances in unexpected situations. Having cash reserves set aside for emergencies can provide financial security and prevent you from relying on expensive forms of borrowing.

Financial planning

Incorporate cash advances into your overall financial plan. If you anticipate needing access to cash occasionally, budget accordingly and make plans for spending and saving to minimize their impact on your finances.

Types of cash advances

Cash advances can take various forms, depending on the financial institution and the specific terms of your credit card. Here are some common types:

  • ATM cash advance: This is the most common type of cash advance, where you use your credit card at an ATM to withdraw cash. You typically enter your PIN and select the amount you want to withdraw.

  • Over-the-counter cash advance: Some credit card companies allow you to request a cash advance by visiting a bank branch and speaking with a teller. You may need to provide identification and your credit card, and the teller will process the cash advance transaction.

  • Convenience check cash advance: Some credit card issuers provide convenience checks that you can use to withdraw cash. You write the check to yourself or another payee, and the amount is charged to your credit card as a cash advance when the check is processed.

  • Merchant cash advance: Many credit card issuers allow you to request a cash advance online or through their mobile app. You log in to your account, specify the amount you want to withdraw, and provide any necessary information to complete the transaction.

  • Line of credit cash advance: Some financial institutions offer lines of credit that allow you to access funds as needed, similar to a credit card cash advance. You can request a cash advance from your line of credit, and the funds are typically deposited into your bank account.

Costs of credit card cash advances

Aside from the cash advance fee and higher interest rates, here are some other costs of credit card cash advances:

  • ATM fees: If you use an ATM to withdraw cash, you may incur additional fees charged by the ATM operator. These fees can vary depending on the ATM network and location.

  • Foreign transaction fees: If you use your credit card for a cash advance while traveling abroad, you may incur foreign transaction fees in addition to the cash advance fee and ATM fees.

  • Over-limit fees: If the amount of your cash advance pushes your credit card balance over your credit limit, you may be charged an over-limit fee. This fee can add to the overall cost of the cash advance.

Cash advance pros and cons

Understanding the pros and cons of a credit card cash advance can help you make an informed decision about your finances. Here are some advantages of cash advances to consider:

  • Convenience: Cash advances offer quick access to funds, often within minutes, which can be beneficial in emergencies where immediate cash is needed.

  • No credit check: Many cash advance options, such as credit card cash advances or payday loans, do not require a traditional credit check. It makes them accessible to individuals with poor credit or no credit history.

  • Flexibility: Cash advances can be used for various purposes, such as covering unexpected expenses, paying bills, or addressing financial emergencies. There are generally no restrictions on how the funds can be used.

  • No collateral required: Most cash advance options, such as credit card cash advances or payday loans, do not require collateral. Borrowers don't need to risk losing assets if they default on the loan.

It's also important to consider the disadvantages of cash advances:

  • High fees: Cash advances often come with high fees, including upfront fees, ATM fees (for credit card cash advances), and sometimes foreign transaction fees. These fees can significantly increase the overall cost of borrowing.

  • High cash advance APR: Cash advances typically accrue interest at higher rates than regular credit card purchases or traditional loans. Additionally, interest usually starts accruing immediately, with no grace period, leading to higher overall interest costs.

  • Potential for predatory practices: Some cash advance lenders may engage in predatory practices, such as charging exorbitant fees or offering loans with difficult terms for borrowers to understand. It's essential to read the terms and conditions of any cash ad carefully.

Do cash advances impact your credit score?

Withdrawing cash from a credit card can affect your credit score. While a single cash advance may not directly impact your credit score, using cash advances frequently or failing to repay them on time can negatively affect your credit score. High utilization of your credit limit and missed payments can lower your credit score and make it harder to qualify for future credit.

Some cash advances may result in a hard inquiry on your credit report. While a single hard inquiry typically has a minimal impact on your credit score, multiple inquiries within a short period can lower your score.

In addition, taking out multiple cash advances or carrying a high balance on your credit card due to cash advances can contribute to an overall increase in debt. Lenders may view high levels of debt negatively when assessing your creditworthiness.

Alternatives to credit card cash advance

Payday loans

A payday loan is a short-term loan with high costs designed to be repaid with the borrower's next payday, which can be difficult for individuals living paycheck to paycheck. They are often used by individuals who need quick access to cash to cover unexpected expenses or financial emergencies. Here are some key characteristics and considerations regarding payday loans:

  • High interest rates: Payday loans typically have extremely high interest rates. These high rates can result in predatory payday loans, which are one of the most expensive forms of borrowing.

  • Short repayment period: Payday loans are meant to be repaid quickly, usually within two to four weeks, depending on the borrower's pay cycle. This short repayment period can make it challenging for borrowers to repay the loan in full, leading to a cycle of debt if they cannot do so.

  • Small loan amount: Payday loans are usually for relatively small amounts, typically ranging from $100 to $1,000, although the specific limits may vary by state regulations and the lender's policies.

Personal loans

Personal loans are also a great alternative to a credit card cash advance. A personal loan from a bank, credit union, credit card company, or online lender may offer lower interest rates and fees compared to credit card cash advances. Personal loans typically have fixed repayment terms, allowing you to budget and plan for repayment.

Family or friends

Consider asking family members or friends for a loan to cover your financial needs. Be sure to approach this option carefully and formalize the agreement with a written contract to avoid misunderstandings.

Emergency savings

Building an emergency savings fund can provide a financial cushion to cover unexpected expenses or emergencies without relying on credit card cash advances. Start by setting aside a portion of your income monthly until you have a sufficient savings buffer.

Government or non-profit assistance programs

Explore government assistance programs, nonprofit organizations, or community resources that may provide financial assistance, food aid, utility bill assistance, or other forms of support during times of need.

Balance transfer

Balance transfers on credit cards can be an alternative to a cash advance if you're looking to consolidate high-interest credit card debt or take advantage of a promotional offer with a lower interest rate. However, it's essential to consider the fees, terms, and potential impact on your credit score before proceeding with a balance transfer.

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