A cash advance refers to a short-term loan from a bank or lender, and a service allowing credit card holders to withdraw cash from a bank or ATM as a short-term loan. This is not the same thing as withdrawing cash from a bank account; it is borrowed money that must be paid back. Though cash advances do feature fast funding, they also usually generate steep fees and rates, making them a convenient but expensive way to borrow. There is usually a cap to cash advances of around a few hundred dollars.
Credit Card Cash Advances
A credit card cash advance is the most popular kind and entails borrowing a line of credit through your credit card. Interest rates on credit card cash advances are high and there is no grace period, so you will start accruing interest right away. The balance of a credit card cash advance is separate from that of credit card purchases. Though your monthly payment can be applied to both, if you are paying only the minimum amount due, the issuer can legally apply it to whichever balance has a lower rate. The credit card cash advance, which has a higher APR, will then accrue interest for months.
Additional fees include those imposed by the card issuer (some charging a flat rate fee and others charging a percentage of the advanced amount), bank fees from the financial institution handling the advance, and ATM usage fees.
Cash advances have little direct effect on credit score, but they can still have an impact. Taking out a credit card cash advance will raise your balance, thereby raising your credit utilization ratio. This ratio is used by credit scoring models to calculate your credit score, and a high utilization rate indicates risk. If you are unable to make prompt payments because of a high interest rate, and if the advance takes you over your credit card’s limit, your credit score will also take a hit.
When to Use a Cash Advance
Faced with an emergency, lacking resources, in immediate need of cash, and armed with a responsible repayment plan, a cash advance can be a sensible option. However, cash advances are not an easy-way out in cash-only situations, just before declaring bankruptcy, to pay a credit card bill, or for compulsive purchasing.
Cash advances are best used as short-term solutions to dire financial circumstances. They could be safer than a car title loan or payday loan, because they carry even stiffer interest rates and less flexible payoff than credit card debt. Consider all loan options by visiting LiftCredit.com.
