Life can throw unexpected financial curveballs. Whether it’s an emergency car repair or an urgent bill, sometimes you need cash fast. In these moments, you might wonder, Can You Pull Money Out Of A Credit Card? The answer is yes, through a feature called a cash advance. However, before you head to the nearest ATM, it’s crucial to understand the significant costs and potential pitfalls associated with this option. Financial experts generally advise against relying on credit card cash advances due to their high expenses and negative impact on your financial health. Let’s delve into why.
The High Cost of Credit Card Cash Advances
The primary reason financial professionals caution against cash advances is their hefty price tag. Unlike typical credit card purchases, cash advances are treated very differently and come with a range of fees and higher interest rates that can accumulate rapidly.
Immediate Interest Accrual
One of the most significant drawbacks is the immediate accrual of interest. Most credit cards offer a grace period for purchases, meaning you have a period (often around 21 days) after your billing cycle to pay your balance in full before interest charges kick in. Cash advances, however, have no such grace period. Interest begins accumulating from the moment you withdraw the cash.
Higher Interest Rates
Compounding the issue of immediate interest is the fact that cash advance APRs (Annual Percentage Rates) are typically much higher than purchase APRs. For example, a credit card might have a purchase APR ranging from 18% to 25%, but the cash advance APR on the same card could be 25% or even 30% or higher. This means you’re paying a significantly steeper price for borrowing cash compared to making purchases.
Cash Advance Fees
In addition to higher interest rates, credit card companies also levy cash advance fees. These are usually charged as a percentage of the cash advance amount, often ranging from 3% to 5%, or a flat fee, whichever is greater. So, if you withdraw $500 with a 5% cash advance fee, you’ll be charged an extra $25 upfront, adding to the overall cost.
ATM or Bank Fees
Depending on how you access your cash advance, you might also incur ATM fees if you withdraw from an ATM or bank fees if you obtain the cash advance from a bank branch. These additional charges further inflate the total cost of accessing cash through your credit card.
Let’s illustrate with an example. Imagine you take out a $500 cash advance with a card that has a 28% cash advance APR and a 5% cash advance fee. Immediately, you’ll be charged a $25 fee. If you don’t pay back the $500 immediately, you’ll start accruing interest at 28% APR from day one. Even if you pay it off within a month, the interest charges, combined with the initial fee, will make this a very expensive way to borrow $500.
Impact on Your Credit Score
Beyond the direct costs, using cash advances can also indirectly harm your financial health by negatively affecting your credit score. While the cash advance itself won’t appear as a separate negative item on your credit report, it can impact a crucial factor: your credit utilization rate.
Credit utilization is the percentage of your total available credit that you are currently using. It’s a significant component of your credit score, and a high credit utilization rate can signal to lenders that you are over-reliant on credit, making you appear riskier.
When you take out a cash advance, the amount is added to your credit card balance. If this withdrawal pushes your credit utilization rate significantly higher, it can negatively impact your credit score. For example, if you have a $5,000 credit limit and you take out a $1,000 cash advance, your credit utilization instantly jumps from whatever it was to at least 20% (assuming you had a zero balance before). Experts generally recommend keeping your credit utilization below 30%, and ideally even lower, to maintain a healthy credit score.
When Might a Cash Advance Be Considered? (Rarely)
Despite the numerous downsides, there might be extremely rare situations where a cash advance could be considered, primarily in genuine emergencies and when no other options are available. For instance, if you are stranded in a foreign country with no access to your debit card or other forms of payment, and a small cash advance is the only way to get you out of a tight spot, it might be a necessary evil.
However, even in emergencies, it’s crucial to treat cash advances as an absolute last resort. Before resorting to this option, explore all other possibilities, such as:
- Emergency Fund: If you have an emergency fund, this is precisely what it’s for.
- Debit Card: Using your debit card to withdraw cash from an ATM is always a cheaper option.
- Personal Loan: For larger cash needs, a personal loan from a bank or credit union will typically have much lower interest rates and fees than a cash advance.
- Borrowing from Friends or Family: Consider asking for help from your personal network.
Conclusion: Proceed with Extreme Caution
While you can indeed pull money out of a credit card through a cash advance, it’s a financial tool that should be approached with extreme caution. The high costs, including immediate and elevated interest rates, cash advance fees, and potential impact on your credit score, make it a very expensive way to access funds. Understanding the implications is crucial before deciding if a cash advance is the right choice for your situation. In most cases, exploring alternative solutions will be a far more financially sound strategy. As a general rule of thumb, aim to avoid credit card cash advances whenever possible and only consider them as a last resort in dire emergencies.
