What is a Credit Card Cash Advance? The Basics, Drawbacks, and Alternatives

You know that moment when you face an emergency expense like a car repair and the mechanic only takes cash? I’ve been there, and I know firsthand that those situations can spring up. Suddenly you have to come up with some money – fast. 

That’s when the idea of taking out a credit card cash advance might sound like a good idea. A credit card cash advance allows you to access cash directly from your credit card using a portion of your credit limit. These advances are usually limited and begin accruing interest right away — typically at a higher APR than credit card purchases. 

But before you hit that withdrawal button at the ATM, let’s talk about what a cash advance really is, how it works, and whether it’s the best move for your wallet. The short answer is: probably not.

Getting a credit card that allows you to take out a cash advance is surprisingly simple — almost too simple! But it comes with costs well beyond the amount you withdraw, so here’s what you need to know. 

Accessing a Cash Advance

The most common way to get a cash advance is to withdraw the money from an ATM, just like you would with your debit card. 

You’ll also typically need to have a PIN with your credit card for ATM withdrawals. Similar to withdrawing cash with your debit card, you may have to pay out-of-network ATM fees as well as daily ATM withdrawal limits depending on your card’s terms.

Another option is to request a cash advance in person by visiting your card issuer’s bank branch and talking to a bank teller. Once you have the money in hand, it will show up on your credit card statement as a cash advance. 

Withdrawing cash from an ATM or a bank teller may be a fast and simple option. But you can also choose to get cash from your credit card through a cash advance.

While this method is a little old-school, these are just like personal paper checks and can be used to withdraw cash or make purchases up to the available limit on your credit card. You can use these checks to pay bills or make other payments, and those charges will show up on your credit card statement.

Fees and Interest Rates

Getting a credit card cash advance may seem as easy as borrowing money from a friend, but a good friend probably wouldn’t charge you a fee just for asking, let alone continue to charge you interest until you pay them back. Here’s what withdrawing cash from your credit card will cost you:

Cash Advance Limits

Let’s not forget about cash advance limits. Just like your credit card limit, you can only withdraw up to a certain amount of cash from your card. This usually adds up to around 20-30%. 

This means if you have a credit limit of $5,000, you may only be able to borrow a maximum of $1,500, which is 30% of your limit. 

I recommend checking your credit card agreement or online account for your specific limit.

Keep in mind that your credit card balance will include any cash advances you make, which will put you closer to your credit limit and can negatively affect your credit score.

If you need a cash advance as a last resort, it’s best to take out as little money as possible to keep fees and other costs low. Doing this also helps you avoid harming your credit score by increasing your total credit utilization ratio.

By now you might be realizing that credit card cash advances are not all they’re cracked up to be. Here are some drawbacks to keep on your radar.

Immediate Interest Charges

The most immediate drawback is the high cost. Between the fees and the high interest rates that start accruing immediately, a cash advance can be super expensive. The costs add up fast, especially if you’re unable to pay off the advance quickly.

Remember, there’s also no grace period before interest starts accruing, like with regular credit card purchases, so cash advances usually start accumulating interest immediately.

A cash advance may make sense in an emergency situation where you don’t have any other access to liquid cash. In this case, you should also be prepared to pay back the cash advance quickly, as in by your next paycheck, to avoid or minimize the extra fees.

I recommend you check your credit card agreement to see what the cash advance interest rates and fees are so you’ll know the financial implications of withdrawing cash early on.

Debt Accumulation

Because of the high costs and immediate interest accrual, relying on cash advances can lead to a cycle of debt that’s hard to break. If you’re already struggling financially, the additional costs can make it even harder to get back on track.

Almost half of all credit card users carry a balance from month to month. But making only the minimum payment each month can lead to paying hundreds or thousands of dollars in extra interest. If you wait weeks or months to pay back your cash advances, you’ll add to that debt cycle and it’ll cost you more money long-term while limiting your cash flow.

Cash advances can lead to a cycle of debt if you’re not careful.

When I was focused on paying down my consumer debt a few years ago, I couldn’t even consider a cash advance since I already had some credit card debt. It was hard enough to pay down the credit card balances, so adding to that amount didn’t seem worth the trouble to me. 

Sometimes, what seems like a quick fix can actually end up costing you much more in the long run. I had to decide if I wanted to struggle a bit in the present moment or get minor relief and struggle a lot more in the future to pay everything down. I made the right decision by eliminating cash advances as an option.

Possible Credit Score Impact

Let’s not forget how cash advances have the potential to hurt your credit score. When you take out a cash advance, it can cause your credit utilization ratio — the amount of credit you’re using compared to your total credit limit — to spike. 

Since your cash advance limit is typically lower than your overall credit limit, using a big chunk of it can quickly push your utilization ratio through the roof. 

And guess what? High utilization can drag your credit score down faster than you can say “credit report.”

A good rule of thumb is to keep your total credit utilization below 30%. This means your credit card balances shouldn’t exceed 30% of your total credit limit, but it may be best to consider keeping it even lower. 

Experian found that people with very good credit scores ranging from 740 to 799 had an average credit utilization rate of only 14.7%. When your credit utilization rate gets too high, it poses a risk to creditors and implies that you’re struggling with affording to repay the money you borrowed. 

According to myFICO, your credit utilization impacts 30% of your credit score, so it’s pretty important.

A cash advance probably shouldn’t be your first option when you need money suddenly. If you don’t plan to borrow a small amount and pay it off quickly, a cash advance can be just like the carrot that gets dangled in front of a rabbit before trapping it in a cage.

Before you decide to run to the ATM and withdraw money from your credit card, here are some alternative options to think about first. 

Personal Loans

If you need a larger amount of money, a personal loan can be a better option. Personal loans offer lower interest rates compared to cash advances, and the interest is usually fixed as well. This option is more structured and a bit less scary to manage. You can borrow one lump sum and repay it with fixed monthly payments through your repayment term. 

Personal loans typically have a repayment term ranging from one to seven years, but some loans can offer as much as a 12-year repayment term. Having a fixed repayment schedule can make it easier to manage your payments since there won’t be any surprises in terms of what you owe. However, you do need to apply for a loan and get approved first.

Each lender has its own eligibility requirements, but this generally includes checking your credit score and verifying your income to ensure that you can repay the loan in a timely manner. 

Secured Loans

If you have assets like a home or car, you may be able to take out a secured loan with lower interest rates than a cash advance. Secured loans require collateral but may be less costly than a credit card cash advance in the long run.

Similar to an unsecured personal loan, the lender will also still check your credit and income when you apply.

One common example of a secured loan is a home equity loan, where you borrow against the current equity in your home and your house serves as collateral. This option should only be considered if you are confident in your ability to pay back the loan on time since failure to repay a secured loan allows the lender to seize your collateral. 

Borrowing from Friends or Family

Borrowing from friends and family is potentially the cheapest option if you need money fast and don’t want to apply for a loan or pay interest. I recommend borrowing a smaller amount that you can afford to repay quickly and setting clear repayment terms to avoid straining relationships.

Maybe you can draft a simple agreement to ensure both parties are on the same page. If a relative offers you money as a gift, make sure you both understand and agree to the terms and that there isn’t an expectation to pay it back. Otherwise, assume that you will need to repay the money and make plans to do so within a reasonable time frame. 

While credit card cash advances can provide quick access to money in an emergency, they shouldn’t be your first choice,  especially if there are cheaper ways to get the money you need. 

Given the high fees and interest, as well as the borrowing limit, credit card cash advances may not be worth it in most cases. You’ll probably end up turning what was once a short-term problem into a huge headache. 

Always think about the long-term financial implications and explore all your available options before deciding on a cash advance. Alternative options, like taking out a personal or secured loan, opening a 0% APR credit card, or borrowing from family and friends, may work better for your situation.  

I suggest you stick to using your credit card as intended, so you can take advantage of perks like travel insurance and fraud protection. 

Oh, and maybe consider finding a mechanic that doesn’t exclusively take cash. That’s a whole different kind of sketchy.