When you get a credit card, you should receive information about the various terms and rates for the different ways you use the card. One option is to receive a cash advance. While you may know that a cash advance means you get cash to spend how you want, you may not be aware of the true definition and limitations of a cash advance. Find out exactly how it works and what you should know before you decide to get cash from your credit card.

cash in hand

What is a cash advance?

It’s not often in today’s tech-savvy society, but there are times when you must use cash to make a payment. Perhaps the company or individual doesn’t take credit cards or checks, but you don’t have the money in your bank account for the payment. If you need cash, you can turn to your credit card for a cash advance.

A cash advance in simple terms is money you receive in cash from the available credit on your credit card. It is basically a loan on your credit limit that you can use to spend in any way you wish. You can go to an ATM or a bank with your credit card and enter your PIN (or whatever identification the credit card company requires) to withdraw money. You do the same thing as you would if you were checking the balance of your card except you hit “withdrawal” instead of “balance inquiry.”

Just like with any payment where you use your credit card, a cash advance must be repaid. You will be charged interest for the advance based on the amount you withdrew. As with credit card purchases, interest continues to accrue until you have paid off the balance. It is an easy and convenient way to get access to cash when you don’t have enough in your bank account.

You can get this money for emergencies as long as your account is in good standing and you haven’t maxed out your credit card limit. However, just because it is easy to get a cash advance doesn’t always mean it’s wise to do so. First, you need to understand how a cash advance works so you realize what you are doing when you hit that withdrawal button.

How does a cash advance work?

When you receive your credit card, you usually receive a personal identification number (PIN) in a separate mailing. The PIN is required for you to be able to get a cash advance. Another option is to take your credit card into a bank and request a cash advance. You won’t need a PIN then because you can use your driver’s license or another form of identification to prove that you are the account holder.

When you check your credit card balance after getting a cash advance, you’ll notice a fee that has been added. In fact, you may read about the fee when you’re requesting the advance and may be required to agree to it before you receive your money. The fee is usually a percentage of the advance you’re requesting and comes off your credit limit immediately.

For example, you may get $400 in a cash advance and the cash advance fee is 3%. This means that to get $400, you will have to pay another $9, or a total of $409. This doesn’t sound like much if you really need the money, but it can mean the difference between going over your limit or the transaction being denied if you are close to maxing out your credit card.

Are there limitations with a cash advance?

You are generally limited to a certain percentage or amount of your credit limit for a cash advance. For instance, you may have a $1,000 credit limit, but you may only be able to get a $500 cash advance. This limit is designed to prevent people from using their credit cards for cash emergencies for too long. Many credit cards also have a daily cash advance limit.

For example, you may be able to use your card to get up to $500 in cash, but you may have a daily limit of $200. These are just examples, and each credit card company has their own limits and rules, so check your card agreement. It’s also important to note that if you use your card to send a Moneygram or Western Union, some credit card companies count that as a cash advance, limiting your daily total.

Do you have to pay interest on a cash advance?

While the credit card advance fee doesn’t seem like much, it isn’t the only charge you pay. You’ll also pay interest on your cash advance just like with any other purchase with your card, except you usually don’t receive a grace period. For instance, with a store purchase where you swipe your card, you usually have 20 days or even 30 days to pay off the balance before any interest is accrued and added to your account.

This allows you to use your credit card to buy something even if you don’t have the money now. You can pay it back before interest is charged so you end up paying nothing more than what you would if you originally had cash. However, getting a cash advance doesn’t work the same way.

In most cases, you’ll start paying interest from the day you receive the cash. Interest continues to add up until you pay it off in full. Another thing to consider is the interest rate. If you look at the details of your credit card account carefully, you may see more than one interest rate. Credit card companies often charge a separate rate for cash advances than for regular purchases. Not surprisingly, this rate is usually higher.

Another issue with getting a cash advance is you don’t get rewards for using your card in this manner. If you have a rewards credit card, you may get points for every dollar you spend on purchases. Cash advances usually don’t count towards any points, miles, or other rewards. It’s far better to use your card to make purchases if you want to increase your rewards balance.

Is a cash advance right for you?

Once you understand the details of a cash advance, you can see how they can be beneficial in extreme situations, but they should only be used as a last resort. You can often find other ways to get the cash you need rather than relying on an advance from your credit card. It may be a quick way to get cash, but it’s also a costly one. When shopping for credit cards, be sure to compare fees and interest rates to get the best deal.

If you find you absolutely must get a cash advance, commit to paying it off as quickly as possible. It’s also a good idea to build an emergency fund to rely on rather than using your credit card for cash. By creating a strong buffer of cash, you’ll save yourself a lot of time, money, and worry in the long run. A cash advance is a good backup to have, but don’t rely on it for every financial emergency that pops up.