It’s a common question for credit card holders: Can You Take Money Out Of A Credit Card? The short answer is yes, you can. This is known as a cash advance. While it might seem like a convenient option in a pinch, especially when you need quick cash, it’s crucial to understand the significant costs and potential downsides associated with this type of transaction. Financial experts generally advise against relying on credit card cash advances due to their expensive nature and possible negative impacts on your credit score. Let’s delve into why taking money out of your credit card as a cash advance is often a costly move.
How Credit Card Cash Advances Work
A credit card cash advance is essentially a short-term loan from your credit card issuer. Instead of using your card to make a purchase, you’re borrowing cash directly against your credit line. Think of it as using your credit card to get actual money, similar to withdrawing cash from a debit card linked to your checking account, but with very different terms and fees.
You can typically access a cash advance in several ways:
- ATM Withdrawal: Using your credit card at an ATM to withdraw cash.
- Bank Teller Withdrawal: Visiting a bank that partners with your credit card network and requesting a cash advance.
- Convenience Checks: Some credit card companies provide convenience checks that you can write to yourself or others to access cash from your credit line.
While the method might seem straightforward, the costs associated with these withdrawals are where things get complicated and expensive.
The High Costs of Credit Card Cash Advances
The primary reason financial experts caution against cash advances is their high cost. Unlike regular purchases made with your credit card, cash advances come with a range of fees and significantly higher interest rates, which can quickly accumulate and make this a very costly way to access funds.
Transaction Fees: Upfront Costs
One of the first expenses you’ll encounter is the cash advance fee. This is a one-time fee charged as a percentage of the cash advance amount or a flat fee, whichever is greater. It’s common to see cash advance fees ranging from 3% to 5% of the amount you withdraw, but it can vary depending on your credit card issuer. For example, if you take out a $500 cash advance with a 5% fee, you’ll immediately be charged $25, reducing your actual cash received and increasing your balance right away.
High Interest Rates and No Grace Period
Perhaps the most significant cost factor is the interest rate applied to cash advances. Interest rates for cash advances are typically much higher than the rates for regular purchases on the same credit card. Furthermore, unlike purchases which often have a grace period (allowing you to avoid interest if you pay your balance in full by the due date), cash advances start accruing interest immediately from the day you withdraw the money. There is no grace period for cash advances.
To illustrate this, consider the Blue Cash Preferred® Card from American Express. It might have a variable APR for purchases ranging from 18.24% to 29.24%, but the APR for cash advances can jump to a significantly higher 29.49% (as of the last update of the original article, and it’s important to check current rates as terms apply and rates can change). Similarly, a card like the Capital One QuicksilverOne Cash Rewards Credit Card might have a purchase APR that’s the same as its cash advance APR, around 29.74% variable. This means you’re paying a very high interest rate from day one on the borrowed amount, and it compounds daily.
ATM or Bank Fees
In addition to the cash advance fee and high interest, you might also incur ATM fees if you withdraw cash at an ATM, or bank fees if you process the advance through a bank teller. These additional charges further increase the overall cost of accessing cash through your credit card.
Impact on Your Credit Score
Beyond the immediate costs, taking out a cash advance can also indirectly affect your credit score. While the cash advance itself won’t appear as a separate negative item on your credit report, it can negatively impact your credit utilization ratio.
Credit utilization is the amount of credit you’re using compared to your total available credit. It’s a significant factor in calculating your credit score. A high credit utilization rate (generally above 30%) can signal to lenders that you are overly reliant on credit, potentially lowering your credit score.
When you take out a cash advance, it immediately increases your credit balance, thus potentially raising your credit utilization rate. If the cash advance amount is substantial relative to your credit limit, it could significantly increase your utilization, leading to a drop in your credit score. This impact can be especially harmful if you’re planning to apply for a loan or mortgage in the near future, as a lower credit score can result in less favorable terms or even denial of credit.
Are There Ever Good Times for a Cash Advance?
While generally discouraged, there might be very limited situations where a cash advance seems like the only available option. For instance, if you are in a genuine emergency situation where you need immediate cash and have absolutely no other alternatives, a cash advance might be considered. However, even in emergencies, it’s crucial to weigh the high costs and explore all other possible options first.
Better Alternatives to Cash Advances
Before resorting to a costly cash advance, consider these potentially more affordable alternatives:
- Personal Loan: If you need a larger sum of money, a personal loan from a bank or credit union usually comes with lower interest rates and more favorable repayment terms compared to cash advances.
- Balance Transfers: If you have other high-interest debt, exploring a balance transfer to a credit card with a 0% introductory APR (if available and suitable) might be a better way to manage your finances, though this doesn’t directly provide cash.
- Emergency Fund: Building an emergency fund in a savings account is the most financially sound way to prepare for unexpected expenses, eliminating the need to rely on expensive credit options like cash advances.
- Debit Card: Using your debit card to withdraw cash from your checking account is always a cheaper option than a credit card cash advance, provided you have sufficient funds.
Conclusion
In conclusion, while you can take money out of a credit card in the form of a cash advance, it’s generally not a financially wise decision. The combination of upfront fees, high interest rates that start accruing immediately, and potential negative impacts on your credit score makes cash advances a very expensive way to borrow money. It’s almost always better to explore alternative options and reserve cash advances for absolute emergencies when no other options are available. Understanding the true cost of a cash advance is the first step in making informed financial decisions and avoiding unnecessary debt.
