What is a cash advance?

A cash advance is a withdrawal from your line of credit. It’s not like using your credit card to pay for a new dishwasher; a cash advance is like withdrawing money from your savings account, except you’re borrowing cash from the bank’s credit card.

How do you get a cash advance?

Unfortunately, getting a cash advance is easy (that’s how I fell into the trap as a young person!). You can use an ATM and choose ‘credit’ from your list of accounts, then the amount you want to withdraw, and the cash will spit out into your hand. The same goes for using your card at a supermarket to take out some cash as you pay for your groceries. The problem with cash advances is that you’ll pay interest on it immediately (there are no interest-free days) and the interest rate is extraordinarily high, usually higher than the standard interest rate for your regular purchases.

The big disadvantages of cash advances

You can probably expect to pay somewhere between 20% and 25% interest on your cash advance. Yes, that’s high. You might also pay a fee for the withdrawal, as a percentage of the amount (around 2% to 4%) or a flat fee of $5 or so. Remember, you’re also paying interest immediately with no grace period, so your withdrawal is going to start costing you more by the very next day.

Undoing a cash advance

If you’ve made a cash advance, the best thing to do is repay it as soon as you can. Deposit the cash back onto your card to stop the interest being charged, and go back to using the credit wisely.

Photo source: Shutterstock