As a credit card holder, you probably have the ability to take a cash advance. As the name suggests, this is money that you take from the credit limit of your credit card.
This all sounds good, right? Well, before you proceed with a cash advance at a local ATM, it’s critical that you understand the potential drawbacks of doing so.
Before we talk about the disadvantages, let’s review some of the benefits of a credit card cash advance:
- No credit check required
- No loan approval process
- Fast and easy access to cash
If you’re ready to take advantage of a credit card cash advance, you should first think long and hard about these potential drawbacks:
1. High APR
You should always expect the interest rate associated with a credit card cash advance to be extremely high. In fact, it can be 2x the rate of credit card purchases.
Don’t be surprised if you learn that a credit card cash advance is attached to an APR as high as 27 percent.
2. More Fees
You spend a lot of time and energy trying to avoid credit card fees. However, if you take a cash advance, you’re likely to get hit with a fee on the spot.
Most credit card issuers charge a fee between three and five percent of the total advance. So, if you opt for a $5,000 cash advance, expect a fee in the $150 to $250 range.
3. Your Credit Score is at Risk
There’s no guarantee this will happen — as it depends on factors such as your credit card balance and limit — but it could come into play.
When you take a cash advance, it adds to your balance and increases your credit utilization. As a result, it can drag down your credit score. Remember, you want to keep your credit utilization as low as possible.
There’s nothing wrong with taking a credit card cash advance if you determine that the pros outweigh the cons. Just make sure you have a good reason for going down this path.
If a cash advance doesn’t make sense, turn your attention to other options. For example, a personal loan or a loan from a family member often makes more sense.
What are your thoughts regarding the pros and cons of a credit card cash advance? Do you have experience with this? Do you have plans to experiment with it in the near future?