A Guide to Cash Advance Fees
Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.
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Look, we’ve all been there: It’s the end of the month, you’ve already squirreled away your rent that’s due in a couple of days, and you’ve resigned yourself to declining all social engagements until next week—and then an emergency bulldozes through your life to upend all your planning. Or maybe you’re in a foreign country and don’t have any cash and need local currency to pay for your dinner at a restaurant that doesn’t accept cards. Whatever the reason, sometimes you just need to be able to access cash you wouldn’t otherwise have. And you need it fast. So fast that you don’t have time to go to the bank to take out a loan. That’s when many of us might choose the option of last resort: The credit card cash advance.
Here’s the thing about credit card cash advances: They’re incredibly convenient, but should really only be considered in an emergency. They’re also very expensive. Basically, a cash advance is a cash loan you take out on your credit card. Usually it works in the same way as withdrawing cash with your debit card from an ATM would. But instead of withdrawing from your checking account, you’re borrowing money from your credit institution. Thinking this is anything else but a loan with hefty interest rates would be a big mistake.
Every time you take out a cash advance with your credit card, your credit institution will charge you a fee for doing so. That means that on top of interest you’ll be accruing right away, from the day you make the cash advance,—there is no grace period of a month, as would be the case with regular credit card purchases—you’ll also be slapped with a fee immediately. That means that the amount you’ll be charged interest on is actually higher, from the start, than the cash you’re receiving in the moment. You can probably see why you wouldn’t want to make a habit out of relying on cash advances to pay your groceries.
The way a cash advance fee is calculated varies. Some credit card companies simply charge a flat rate per transaction, such as $10, while others may charge a percentage of the cash amount. For example, if you take out a cash advance of $100, then the company may charge you a flat fee of $10, even though they usually charge 5% of the withdrawal amount. In addition to all of this, it’s also quite likely that the ATM company you’re withdrawing from will hit you with a fee as well.
Here’s a sobering look at the average fee of a cash advance across the United States, Canada, and the UK, as well as the average interest rate (in terms of the annual percentage rate) that accrues for a cash advance on a credit card.
| Feature | United States | Canada | United Kingdom |
|---|---|---|---|
| Average fee | 5% or $10, whichever is higher | $3.50 | 3% or £3, whichever is higher |
| Average interest rate | 23.68% | 23% | 25.04% |
How to avoid cash advance fees
Now that we know how cash advance fees can really contribute to your credit card debt spiraling, you might be wondering if there’s any way to avoid cash advance fees. Unfortunately, the only way to avoid a cash advance fee is pretty simple: Don’t take out cash advances on your credit card. If you really must, then try to take out as little as possible and pay off the balance right away, even if your bill isn’t due yet. Remember, interest on cash advances starts accruing right away, and the interest rate tends to be higher than average.
Pros and cons of credit card cash advances
A last resort. If you’re truly in an emergency where you need cash right away and you can’t put it the charge on your credit card, a cash advance will be useful. Just remember to have a plan to pay it off right away.
No grace period. As mentioned before, cash advances on credit cards don’t include the usual grace period wherein interest on purchases isn’t charged until the next billing cycle. Instead, interest starts accumulating immediately, the second the cash hits your hands.
Additional ATM fees. In addition to cash advance fees, you’ll probably also be hit with an ATM fee that can range anywhere from $2 to $5.
Higher interest. So because interest starts accumulating right away, cash advances carry higher interest rates than the rates that are usually applied when you purchase something with the card. And the longer you don’t pay it off, the higher that interest will be.
Risk of spiraling debt. All that high-interest, accumulating debt can very quickly lead to a debt spiral. The best way to ensure that doesn’t happen is to avoid accumulating that kind of debt in the first place. The second-best way to ensure that doesn’t happen is to pay off the amount you’ve withdrawn, including the fee, as quickly as possible.
Alternatives to credit card cash advances
There are plenty of alternatives to explore when you’re in a bind and need access to cash.
Short term personal loan. Friends or relatives will often provide help during a financial crunch.
Bank personal loans. If your credit is good, getting a personal loan from a bank may be a much better—and ultimately way cheaper—option. Just make sure to compare interest rates, monthly payment schedules, and terms from different banks to make sure you’re getting the best deal and the lowest rates.
Salary advances. Depending on your employer, you might be eligible for an advance on your salary. However, the fees and the interest rates vary wildly, so it’s worth doing your research and knowing what exactly you’re getting into before choosing this option.
Borrow from your retirement plan. While many retirement accounts like 401(k)s and IRAs do let you essentially “borrow from yourself,” you should keep in mind that the money you’re then repaying in interest will be double-taxed: The money you use to repay the amount—plus interest—you withdrew will have already been taxed, and then it will be taxed again once you withdraw for retirement.
If you find yourself in a financial bind and can’t see a way out, the key is to take a step back and not panic: It’s probably best to exhaust other options before choosing to go for a credit card cash advance.
What is a Cash Advance Fee?
When you’re looking into cash advances, you’re likely to see something called a cash advance fee. The merchant cash advance industry has changed rapidly as technology and online lending have improved over the years. Whether you’re a small business owner who can’t wait another day for loan approval or a recently laid-off worker in need of cash quickly, understanding what a cash advance fee is will help you determine whether or not it is a viable solution for you. However, you’re not alone. It’s estimated that 80% of small businesses in the United States are reliant on some form of credit.
So, with roughly 22 million American small business owners in the same position, it’s important to know about cash advances fees
How a Cash Advance Works
Simply put, a cash advance allows you to borrow money against your line of credit, personal property, or paycheck. Depending on the type, there’s typically no application to fill out, unlike a traditional loan process. It’s easy to get cash fast with this option.
There are a variety of cash advance types to consider before you take any action. Familiarizing yourself with these will help avoid any confusion in the long run.
If you’re a business owner who is struggling financially, it’s important to educate yourself and understand all of your options. Given the current climate with COVID-19, many businesses are struggling to pay their bills. Analyze your financial planning and budgeting strategy to see how a cash advance will affect your business in the future.
Merchant Cash Advance
The merchant cash advance is ideal for small businesses that process credit card transactions. After applying, the business owner will receive a sum of cash almost immediately. Repayment options vary by provider, however, daily repayment is the most common. This means every time a customer pays with their credit card, the owner and lender each receives a percentage of those sales until the advance is paid in full. This type of advance typically depends on credit card processing and can be set up with your existing merchant services provider.
It’s important to know interest rates may fluctuate depending on the provider, so, it’s vital to shop around for a trustworthy provider.
Credit Card Cash Advance
As the name implies, this is where a person borrows money from their personal line of credit. To request this type of advance, you can visit your nearest bank, go to an ATM, or use a convenience check.
If you choose to use an ATM, please note you’ll have to enter a PIN for your credit card. If you don’t have one, you’ll need to request one from your credit card issuer first.
Some credit card merchants provide their customers with convenience checks. If you have these, simply write a check to yourself and cash it. However, if you prefer to visit a bank in person, bring your credit card and request a cash advance from the teller.
It is important to understand the cons of this method. There is no grace period with a credit card advance, and there are high fees and often higher interest.
Direct Deposit Advance
While many banks have discontinued this service, direct deposit advances still do occur. In this scenario, a person will have their bank advance them an amount based on their typical direct deposit amount.
The fees are quite high with this type of advance which is why it is not often used.
Payday Loans
While cash advances are not actual loans, they do work in similar ways.
Payday lenders issue payday loans. They allow a person to borrow against their paycheck (typically anywhere from $50-$1000). It’s then expected that upon the next paycheck, the loan will be repaid in full.
If you choose to go this route, please note that in addition to high-interest rates, there will also be large fees associated with this type of transaction.
Installment Loans
This type of loan is secured by a borrower’s personal property. Installment loans allow a person to borrow money and repay it back in increments over a specific amount of time. This is a more long-term type of loan.
Installment loans are one of the more affordable options out there on the market for cash advances.
What is a Cash Advance Fee?
Each type of advance carries fees and/or high-interest rates. You may be asking yourself, “what is a cash advance fee?” and “how will it affect my business?” Don’t worry, we’re here to break down the elusive cash advance fee and your other options.
A cash advance fee is a fee charged by the lender for taking the risk associated with lending the money. Cash advance fees vary by lenders and the terms you agree to.
The Cost of a Cash Advance Fee
If you’re familiar with paying credit card processing fees, a cash advance fee should not be much of a shock to you. However, the rate of a cash advance fee depends on the amount you’re borrowing and the method your lender uses to calculate their fee.
It’s common for a credit card issuer to charge a flat fee or percentage based on the amount advanced. They will choose whichever is greater and assign that fee. You have the right to ask your issuer how they calculate their fees. This is usually found in your merchant agreement or account information
The typical fee for a cash advance is $15 per $100 borrowed. This is a relatively high amount and does not account for interest, which the borrower is responsible for on top of the repayment and fee.
Can You Avoid a Cash Advance Fee?
Unfortunately, there is no way to avoid a cash advance fee unless you simply decide not to get one. If you would like to minimize the cost of fees, you can do this by borrowing a smaller amount, as the fees are determined by the advance. Another way to reduce your cash advance fee is by shopping around for the best rate. Determine your top three lending options and go from there.
If a cash advance fee is deterring you from this financing option, consider an alternative way to acquire credit for your business.
Cash Advance Alternatives
Although cash advances can be an asset to your business in tough times, some individuals prefer alternative methods for financing their businesses. A cash advance fee is something worth weighing when seeking out a cash advance. If you come to the conclusion that a cash advance is not in your best interest, there are other options available to you.
Alternatives Available
- Retirement Account Loan. If you have a small business 401k plan you can withdraw funds from it early with a penalty. If you invest in a Roth IRA, you are able to access those funds at any time without penalty.
- Personal Loan. If you’re in a pinch and have an excellent credit score, interest rates for a personal loan are often lower than a cash advance. You’ll need to apply for the loan and go through an approval process, but the amount you can borrow is much higher than a cash advance can offer.
- Business Loan. While business loans require you to sign various documents and wait for approval, they often have lower interest rates. Businesses also have credit scores, so if you own an entity with a history of good credit, this may be a viable option for you.
- Pay Bills With a Credit Card. During times when money is tight, you can use a credit card to pay for bills and essentials which will free up the amount of available cash in your budget.
- Negotiate, Negotiate, Negotiate. If you have a good credit history, you can speak to your credit card providers and negotiate down the interest rates. Another point you can try and negotiate is a longer payment term or even a payment plan. In the end, communication with your provider will be key to coming up with a strategy where you can pay them back rather than default.
Is a Cash Advance Right For You?
Coming up with the capital to fund your business is an important step for any business owner. While there are many options out there for financing, each comes with its drawbacks. Cash advance fees are a necessary evil of quick approval and fast cash. If you find yourself in the position to borrow money quickly and are able to pay it off through regular credit card transactions, a cash advance fee should not be a deterrent. After all, it’s up to you to decide which option is right for your business.
Cash Advance: Explained
An introduction to Cash Advance and why you shouldn’t use it
What is Cash Advance?
Cash Advance is the process of obtaining cash using a credit card. With Cash Advance, you can instantly turn the credit limit on your Credit Card into cash. This would come in handy in times of emergency or if there’s a need for extra cash for your home furnishing, etc.
Cash Advance Fee
From the moment you take out a cash advance, you would have already incurred a hefty fee. Typically, there is a Cash Advance fee of $15 or 8% on the amount withdrawn, whichever is higher. For instance, if you took a $1000 cash advance, you would incur $80 upfront.
Cash Advance Interest Rate
The interest rate for Cash Advance is unreasonably high at 28% a year, and it is compounded on a daily basis. The same $1000 cash advance you took out earlier will set you back at $335 after a year, and that is more than 1/3 of the original amount you withdrew.
Conclusion
Cash advance is a costly option for consumers. The cost is often so high that it negates any short-term benefit you may receive from a Cash advance. It should be the last resort to obtaining cash after exhausting all other means.
If you are in need of cash, you can consider taking a personal loan. They have much lower interest rates and the interest charged has no compounding effect. To top things off, you can even repay the loan in monthly instalments. This will give you the time and flexibility in managing your cash flows.
Cash Advance Fee
A cash advance fee is a charge you may receive for withdrawing funds from a credit card account. This can be done at an ATM, online, or at a branch of your bank.
What Is A Cash Advance Fee?
Have you ever had a financial emergency and the only available option for some quick cash was getting a cash advance on your credit card? If so, you probably found that the fees in a credit card cash advance were different from your normal credit card purchase fees.
Additionally, the cash advance balance is also subject to a different annual percentage rate (APR – the annual interest rate) compared to the purchase balance APR. Below is an overview of what you need to know about the cash advance fee and the related cash advance costs.
Cash Advance Fee Basics
Just as the term suggests, a cash advance lets you get cash using your credit card. This is different from the conventional use of credit cards to purchase items without cash. It may be useful when buying items that you cannot use credit for, such as making purchases from friends and family who do not take credit cards.
Taking out cash from your credit card is different from withdrawing cash from your debit card. The cash you get from your debit card comes from your checking account; whereas, a credit card cash advance is effectively borrowing from your credit card limit.
The credit card cash advance comes with a fee and other related costs that you pay when repaying the money, just as you do with credit card purchases. You can get a credit card cash advance through several means that vary based on your credit card company, including:
- From an ATM
- Through a bank teller
- Moving cash from your credit card to a checking account
- Cashing a convenience check
How Does a Cash Advance Fee Work?
When you perform a cash advance transaction, the card company may either charge a flat fee or a percentage of the transaction. The fee is sometimes the higher of the two options.
Keep in mind that the amount of the cash advance fee may also vary based on how you access the cash. You may incur varying costs depending on whether you access the cash from an ATM, through a bank teller, by moving cash from your credit card to a checking account, or by cashing a convenience check.
Apart from the cash advance fee, card issuers will also charge interest on your cash advance balance, since you’re essentially borrowing cash from your credit card account. This interest charge is different from the interest charge on normal credit card balances.
The cash advance APR is typically higher than other credit card balance APRs, including the APR on a purchase balance. Also, the cash advance APR starts accruing immediately because it doesn’t have a Grace period. This is the main difference between a credit card purchase and a credit card cash advance.
Each credit card comes with different APRs, fees, and terms. Reading the fine print on your specific card will tell you what the interest rate and other terms are for your situation. There are several conditions related to the two main methods through which you can access a cash advance:
- Withdrawing cash from an ATM: Here, the cash advance is subject to a cash credit limit, which is normally a fraction of your total credit line. Your credit card issuer will provide you with details of your cash credit limit and the PIN required to make a cash advance at an ATM.
- Using your credit card to write checks or transferring money into a bank account: This type of cash advance may be subject to a lower cash credit limit than the ATM withdrawal method.
How Much is a Cash Advance Fee?
Compared to all other credit card fees, cash advance fees tend to be the highest. A cash advance provides some convenience and speed in accessing cash fast, but that comes at an extra cost, which can be an additional $10 to $50 in fees.
Credit card issuers may use one of the following methods to calculate your cash advance fee.
- A flat rate fee: The card issuer charges a fixed amount regardless of how much money you withdraw. For many banks, the flat rate fee is usually about $10. That means, if you withdraw $370, you will have to pay $380.
- A percentage of the amount you withdraw: The percentage often ranges between 2% and 5%. Therefore, if you withdraw $370, your fee would range between $7.40 and $18.50.
- A combination of a flat rate and percentage fee: Most card issuers charge either a percentage of the amount withdrawn or a minimum flat rate – whichever is higher. That means if the percentage fee of your cash advance balance is lower than the flat rate, you would pay the flat rate. For instance, if the fee percentage is 5% and the flat rate is $10, you would pay $10 flat rate for a $50 cash advance instead of the percentage fee of $2.50.
Cash advance fees have been increasing over the last few years. According to WalletHub’s Credit Card Landscape Report, the current average cash advance fee is 3.9% or $12.41.
One more factor to consider is the costs related to the withdrawal method you use for your cash advance. For instance, if you take out a cash advance through an ATM, you’ll likely incur an ATM owner surcharge. This further adds on to the other costs of a cash advance fee and interest charged by your card issuer. The average fee to withdraw money from out-of-network ATMs is about $4.72.
Foreign Cash Advance Fees
Cash advance fees also vary based on the currency transacted. If you’re travelling and you try to access a foreign currency cash advance from your credit card, you may incur higher fees. Some credit cards add between 1% and 3% to your cash advance with foreign transactions, which is in addition to ATM fees and the currency exchange.
Cash Advance Fees on Cash Equivalent Transactions
A cash advance fee may also apply to cash equivalent transactions. Some examples of cash equivalent transactions include:
- Using your credit card as overdraft protection
- Purchasing a Money order
- Putting money on reloadable gift cards
- Buying lottery tickets
- Sending money to another person
A cash equivalent transaction is treated like a cash advance even when you don’t take out cash from an ATM. However, the cash equivalent transaction fee may be different from a regular cash advance fee.
Other Costs Related to a Cash Advance: Interest
The interest on your cash advance balance applies as soon as you withdraw money from an ATM, transfer cash to a deposit account, or use a check. This is unlike the typical 21 to 25 day grace period that applies to most credit card purchase balances. The cash advance APR ranges between 20% and 36%, with an average of 21.20%. That’s frequently higher than a credit card purchase balance APR, which typically ranges between 14% and 23%.
Why Use a Cash Advance?
A cash advance may be useful in several situations, including:
- Providing funds to cover an emergency expense that you can’t charge to your credit card. You may need to make a purchase, but the seller doesn’t accept credit cards.
- Getting fast access to cash. You may need money urgently and a credit is the quickest option available.
- A credit card cash advance may be a less costly option than a bank overdraft.
- When you lack other alternatives to access cash, a cash advance may provide the financing you need.
In all these cases, always compare the cost versus the potential benefit before making a decision. It’s also important to understand how your credit card payments are applied to a cash advance balance, so you can avoid accruing high interest on the balance.
A key aspect to remember is that a cash advance balance is usually treated as separate from your purchase balance. This is a good thing, since the higher cash advance APR that accrues without a grace period only applies to the cash advance balance.
What you should take note of is how your payments are applied to your cash advance balance and purchase balance. When you make the minimum credit card payment, that amount may go toward the purchase balance first. Thereafter, any payment over the minimum might be applied to your higher-interest balance, but not always.
In general, to pay off your cash advance balance (including the cash advance fee and interest), you will probably have to make more than the minimum credit card payment.
How to Find Out Your Credit Card’s Cash Advance Fee
Under the Fair Credit Reporting Act, your card issuer is required to disclose your cash advance fee and provide information on how it’s calculated. You can find the details on your credit card agreement or the back of your billing statement.
Credit card issuers typically provide their customer service department number on the back of the credit card, so customers can call to have their questions answered as well.
Ways to Limit Cash Advance Fees
Since cash advance fees and related costs can be expensive, you can try different strategies to limit them, including:
- Understand the type of fee: If your fee is a percentage of the overall cash advance, you can limit the total fee charged by withdrawing only as much as you need. If the fee is a flat rate, you can limit the total fee charged by taking all the cash that you’ll need at once. This saves you from paying the flat fee for multiple smaller transactions.
- Limit your cash withdrawal: Since a cash advance APR applies to your balance, you can limit the amount of interest you pay by limiting the cash you withdraw.
- Avoid foreign cash advances: When travelling outside the country, possibly consider a local credit card so you don’t incur higher foreign cash advance fees with your U.S. credit card.
- Use the cheapest cash withdrawal method: Depending on your credit card, figure out which cash withdrawal method is least costly and use it.
- Plan for quick repayment: Since cash advances don’t have a grace period, the interest rate kicks in as soon as you make the transaction. Plan beforehand to repay the cash advance as quickly as possible.
How to Avoid Cash Advance Fees
Apart from limiting your cash advance fees, you may have other options to avoid the fees, including: