Why cash advances are dangerous

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

I'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.

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.

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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.

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