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Why cash advances are dangerous

Here are 3 reasons to limit your use of credit card cash advances to extreme emergencies -- if you use them at all.

By MSN Money Partner Jun 15, 2012 11:15AM

This post comes from Rob Berger at partner blog The Dough Roller.


The Dough Roller on MSN MoneyI've used a credit card to get a cash advance once. I was in college, traveling in New England, and I ran out of money. And it cost me a fortune.

Image: bank ATM (© Image Source/Corbis/Corbis)A cash advance allows you to get cash from your credit card in one of two ways. First, if you have created an ATM PIN with your card, you can get cash at a teller machine just like you would with a debit card or prepaid card. Second, you can present your card at a bank to get cash, which is what I did. (They didn't have many ATMs back then!)

In a true emergency, a cash advance may be your best (and only) option. But there are three good reasons to do everything in your power to avoid using your credit cards at ATMs.

Cash advance fee

Credit cards will levy a fee based on the amount of the cash advance. For most credit cards, the fee ranges from 3% to 5% of the amount of the advance, with a minimum fee of $10. This fee is in addition to any interest you'll pay. So as soon as you get your money, you're hit with a significant fee. (Post continues below.)

High interest rates

For many credit cards, the interest rate on a cash advance is higher than the card's regular APR for purchases. There are a few reasons for this. First, the Credit CARD Act has limited a card company's ability to charge penalty rates, so they tend to jack up the rates right from the start. Second, they view consumers who need to use their credit card for cash to be a higher risk. And third, they charge higher rates because they can. Those needing cash are usually desperate and willing to pay the higher rates.

No grace period

The third reason to avoid cash advances at all cost is the loss of a grace period. When you use a card for a purchase, you typically have a few weeks to pay the card in full before interest starts accruing. But with an advance, interest charges start piling up from the moment you receive your money. So when you get your statement a few weeks later, you'll not only see the cash advance fee, but you'll also see interest charges that have already accrued.

Cash advance versus balance transfer

It's important to note that an advance and balance transfer are completely different. With a balance transfer, you use one credit card to pay off another card. Most transfer offers charge 0% for a limited period of time. And, with the exception of the occasional no-fee balance-transfer offer, most charge a transfer fee of about 3%. Balance-transfer cards can be a great way to reduce your interest payments and get out of debt faster.

Credit limits

Finally, keep in mind that your credit limit may be different for purchases than cash advances. Most credit cards have a much smaller credit limit for advances. So if you are considering using your card to get money, make sure you know your credit limit for a cash advance.


More on The Dough Roller and MSN Money:

Jun 16, 2012 6:17PM
Don't forget, in addition to the fee that the credit card company charges, if you use the credit card at another bank's ATM, you will be charged an additional fee by that bank. So, your total debt will be the cash advance, plus fee, plus interest, and plus the ATM fee. Yes, cash advance can be costly. Banks are in the business of selling money to make a profit.
May 28, 2013 3:48PM
First of all,
This person has no idea what a cash advance is.  It is not a payday loan it is actually an advance of your future sales.  Say I walk into a shoe store and purchase $10,000 worth of shoes in cash in one day.  The business owner would obviously give me a discount.  That discount is equivalent to what the cost of money would be.  How it is paid back is through a holdback percentage.  Lets say you made $1000 a day and the holdback was 10%.  For that day we would take out $100 and the owner keeps $900. The next day he only made $100. For that day we would still take out 10% but the amount taken out would be 10$ and the owner keeps the $90.  By doing this, we keep the cash flow intact and the business stays afloat.  Most cash advances will not have a personal guarantee or collateral thus keeping the positive relations from investor and owner.  It is the traditional banks that are killing business owners with long term interest on top of interest. 
May 28, 2013 3:49PM
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