A cash advance is a loan from your credit card. It usually comes at a higher APR than regular purchases and is often limited to a percentage of your overall credit limit (terms vary by card and customer). Interest accrues from the date of the transaction (there is no grace period). Cash advances can be obtained in a bank branch, at ATMs or by using the paper convenience checks mailed and promoted by the card issuer.
Cash Advance in Theory
A cash advance could be a reasonable option for someone who has an emergency need for money and limited res for getting it – especially when that person has a clear and reasonable plan for paying back the money in a short amount of time. It is, for example, a better option than a payday loan or title loan, due to the exorbitant triple-digit interest rates those loans typically carry and the greater payoff flexibility that comes with credit card debt.
Cash Advance in Reality
A cash advance is a very expensive way to get money, and the risk of falling into revolving debt cannot be ignored. The potential to pay many times the amount of the original advance (in interest charges) is very real. Furthermore, in addition to the higher interest rate, cash advances typically come with additional fees that everyday credit card purchases are not subject to.
Worst Reasons for a Cash Advance
The reasons a person might need a cash advance are as numerous and varied as the population of any city in America. Bona fide emergencies happen every day. But the reasons listed below should be a huge red flag that a cash advance would be a very bad idea:
1. You're about to file for bankruptcy. New credit card debt does not magically disappear in a bankruptcy. Your creditors and a judge will examine your debts, including the dates and types. Once you know or have a strong inclination that you'll soon file for bankruptcy, credit card use of any kind may be considered fraudulent. A cash advance immediately prior to filing is very likely to be challenged by the card issuer and that account may be excluded from the debts that are forgiven in a bankruptcy. For more, see When To Declare Bankruptcy.
2. To buy something you want but can't afford. Credit cards should never be used to acquire things you want but can't afford. It's true that they can bridge the gap between a short term financial need and the ability to pay for it, but a person who confuses wants with needs is at risk of falling into revolving debt. At the very least, spending this way postpones your ability to establish a healthy emergency fund.
Going into debt for wants is also emotionally detrimental. A person who thrives on immediate gratification and the temporary emotional lift of a big purchase will eventually feel regret (and possibly depression, anxiety, stress and other debilitating emotions) when faced with the debt. The more compulsive the purchase, the more pronounced the regret. See 5 Ways To Control Emotional Spending.
3. To pay a credit card bill. Obtaining a cash advance to pay bills is a dangerous financial strategy that puts you very close to financial disaster. It is by nature only a very short term solution and it immediately exacerbates the financial troubles at hand.
4. To buy a gift for someone else. Never go into debt to buy a gift for another person. This is in the category of wants (versus needs). Generosity of spirit is an admirable trait, but not when it is at the expense of your own long-term financial health. We cannot give what we don't have. No truly worthy recipient will be comfortable receiving the gift knowing it caused the giver to fall into costly debt.
The Bottom Line
Any consumer with a cash emergency should conduct a realistic and honest self-assessment to answer a few tough questions: Why do I need the money? Can I say no to this expense? Do I pay off my credit cards each month? How and when will I pay off this cash advance? What are the fees and interest rate, and what will my total cost be? What is my plan for building an emergency fund? See Budgeting Basics to help you get started on better financial planning.
Avoiding the need for a cash advance requires careful planning and conservative financial behavior over the long term. Financial solvency does not come easily to everyone, nor does it happen quickly. But smart money moves add up over time. For more information, read The Best And Worst Ways To Raise Cash Quickly.
