Cash advances are essentially loans that are funded from the open balance in a credit card account or a line of credit. Many credit card providers include this feature as part of the services provided to customers. The maximum amount that can be borrowed and the frequency of the allowed advances will vary depending on the terms and conditions of the credit card or line of credit agreement.
How a Cash Advance Works
Along with the credit limit assigned to a credit card or line of credit, the issuer will also usually set what is known as a cash advance limit. This limit may equal the currently available credit limit, or be only a percentage of that amount. The cardholder can get a cash advance at an ATM using the personal identification number (PIN) assigned by the credit card issuer, or at the bank counter if that bank is the issuer of the card. Some credit cards also supply "convenience checks" on the account that can be used in some locations where credit cards are not accepted; these checks are typically considered cash advances.
As long as the requested amount does not exceed the current cash advance limit, a cash advance from an ATM should dispense real currency. If the amount does exceed the limit, the ATM may still dispense the money — or the convenience check may still be honored — but the exchange may be flagged. The advance might be handled in the same manner as a purchase over the credit limit, incurring a penalty or other fee.
Why Use a Cash Advance?
Even though debit and credit cards are accepted in most locations, there are still some services and vendors that require immediate payment by cash or check. Taking out a personal loan for a relatively small amount of cash could prove expensive, while debit cards can only supply what currently exists in a savings or checking account. During a cash emergency, such as paying an medical bill or a mortgage payment, taking out a cash advance against the balance of a credit card may be a good solution.
What Does It Cost?
Using a cash advance option can prove to be expensive, so it's always best to explore other payment methods before incurring more debt. Credit card issuers often charge high fees for taking out a cash advance, on top of the high interest rates that are typically charged on the amount borrowed. Any money borrowed through an advance will be added to the balance owed on the card, along with any applicable interest payments and other finance charges.
The interest rate applied to advances is often much higher than the rate applied to card purchases, and monthly credit card payments are often credited toward the purchases with the lowest interest rates first. This means that a cash advance may stay on the account longer and continue to be subject to that high interest rate until the entire credit card debt is paid off. In addition, there is usually no grace period for cash advances. When a consumer makes a credit purchase, he or she typically has until the next payment on the card is due before any interest is charged on that purchase. Interest begins to accrue immediately on cash advances.
In addition, getting a cash advance at an ATM usually costs more than other methods. Most ATMs charge fees set by the machine's owner, which must be paid on top of any fees that the credit card issuer charges for the service.
Cash Advance Payday Loans
In some cases, a payday loan may also be called a cash advance, since the loan is an "advance" on the borrower's next paycheck. These small, short-term personal loans can be quite expensive, and often include high fees and interest rates. Payday loans are controversial in many places, and are even illegal in some jurisdictions.