How Do Cash Advances Work?

Cash advances are a great way to get money when you need it, but they come at a price. If you have a credit card, you can get immediate access to the funds you need to get you through to the next paycheck. As with any purchase you make using plastic, though, you'll owe the amount you borrowed plus fees and interest by the end of the billing period, and it generally will be a higher rate than you'd owe if you'd just made the purchase with your card.

How Does Cash Advances Work?
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What Is a Cash Advance?

Although much of what you need today can be purchased with plastic, there are still isolated incidents where only cash will do. Perhaps you owe rent money and your landlord will only take cash. When days or weeks remain until payday, it's only natural to begin looking at your options.

When you take a cash advance on your credit card, you use that card at an ATM, just as you would a debit card. Your card issuer likely gave you a PIN number when you received your card but if not, you can likely get one if your account is eligible for cash advances. But instead of taking cash out of your checking account, your credit card company is handing over a loan.

How Does Cash Advance Work?

On the front end, a cash advance works like a regular cash transaction at an ATM. But if you use your debit card, you don't receive a bill later for that ATM withdrawal. With a cash advance on your credit card, you're getting a loan from your card issuer that you will be expected to pay in full. Many credit card issuers consider cash advances separate from card transactions, with separate rates and limits for each.

You'll also notice a difference when your bill comes. With your regular bill, as long as your balance is paid in full during the grace period, you can avoid paying a dime of interest. However, you'll owe interest on your cash advance whether you pay it the next day or on your bill's due date.

What Is a Cash Advance Fee?

Lenders have learned that cash advances have a higher risk of default than regular card transactions, so you'll see a higher fee for this type of activity. Fees usually range from 3 to 5 percent of the amount requested or $10, whichever is the greater amount of the two. This is in addition to the interest you'll pay, which will likely range from 25 to 30 percent APR. If you use an out-of-network ATM, you'll also pay a few dollars extra for that.

If you have a Discover card, though, you may be in luck. The company's "cash over" feature lets you take extra money out at the register if you shop at one of a few dozen participating retailers. This is designed to save you a trip to the ATM, not pay major expenses, but you can take out up to $120 every 24 hours this way. Best of all, you won't pay a fee for using this service and your interest rate will be the same as any other purchase you make using your card.

Do Cash Advances Affect Your Credit Score?

If you take a cash advance and pay it back when the balance is due, it will have no impact whatsoever on your credit score. Your credit card provider will only report you to the credit bureaus if you stop paying the minimum balance due or you make your payments significantly late month after month.

However, cash advances can create trouble for your credit score if you get yourself in too deep. With the extra fees and interest, it can be difficult to pay back the full amount, which means your monthly payments will likely increase. When you pile on additional purchases the next month, you could find that your credit score begins to suffer due to your credit card utilization rate. Experts recommend keeping your overall credit card utilization under 30 percent of your limit.