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New year, new financial attitude? Keep reading to learn why cash advances still aren’t a good way to borrow in the new year.
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When it rains, it pours. You accidentally hit a fire hydrant with your car. Now you’re staring down a $500 insurance deductible, and unfortunately, you’re also one of the 63% of working Americans who can’t cover a $500 emergency expense (as found by SecureSave). What should you do now?
If you’ve got a credit card, you might be considering borrowing against it in the form of a cash advance. This is when you use your credit card like an ATM card and physically pull out cash that comes from your credit limit. Unfortunately, this isn’t an ideal way to borrow money. Let’s take a closer look at why cash advances should be avoided if you have an emergency expense pop up in 2024.
1. You’ll be charged a higher APR
Credit card APRs (annual percentage rate — the amount you’ll pay in interest over a year) can be frightfully high. I took a peek at go-to APRs for the best credit cards, and the lowest one I found was 17.24%. Ouch.
But as high as the APR on credit card purchases is, the APR on cash advances is even higher. I did some investigating, and signed into one of my own credit card accounts to see what the difference is between my card’s purchase APR and its cash advance APR. For purchases, it’s 21.24%, which still isn’t great (it is excellent motivation not to carry a balance on this card, however). But if I were to take a cash advance, the APR on it would be a whopping 29.99%.
And to add insult to injury, cash advances have no grace period, like a regular purchase does. I’d start accruing that interest immediately, and would have to pay it even if I paid off the amount I took as a cash advance by the next bill’s due date.
2. You’ll be charged a fee — and earn no rewards
On top of the higher APR you’ll face for a cash advance, you’ll also be charged a fee for the privilege of extracting cash from your credit card. The fee often amounts to 3% to 5% of the cash advance you take out. While you might be trying to spend enough on the card to earn a sign-up bonus (or even just take advantage of the chance to earn cash back or rewards on your spending), a cash advance won’t count toward these credit card perks.
3. You may not be able to borrow enough money this way
Finally, another reason to avoid cash advances in 2024 (and indeed, future years) is that you’re limited in how much money you can borrow as cash from your credit card. Remember the card I mentioned above, that has a noticeably higher APR for cash advances than purchases? I also took a peek at how much I could take out as a cash advance and my cash advance limit is a mere 5% of the total credit limit on the card. Depending on your credit card’s limit, a cash advance might not be enough to cover the emergency expense you’re hoping to pay with it.
How can you borrow a small amount in a hurry?
So, cash advances aren’t a good idea. But what if you need a relatively small amount of money in a hurry? A personal loan might not be a fit — the best lenders write loans of at least $1,000 (and many of the best lenders have higher minimums). And you definitely don’t want to tangle with payday lenders — there’s a reason payday loans are illegal in 16 states, plus Washington D.C. These lenders are predatory and the interest rates are so high (like, 400%-APR high) that borrowers can easily end up trapped in a cycle of debt.
What’s the alternative? You have a few options. If you are fortunate enough to have kind family or friends who will float you a small loan to see you through, see if that’s a possibility. Put your loan agreement (and repayment terms) in writing, and do your best to repay the loan if someone does you this favor.
Another option is a small dollar loan from your bank or credit union. These often range from $100 to $1,000, and the money can be delivered to your account quickly. You’ll be charged a fee and interest for the service, but that interest will be far less than what you’d incur on a cash advance. If you’re a member of a credit union, you might also hear this means of borrowing called a payday alternative loan, or PAL.
Finally, there may be a better way to get money from your credit card, and that’s a credit card loan. This also has you borrowing against your credit limit, but it comes with more favorable terms than a cash advance. Borrowing in this way could push your credit utilization ratio up to unfavorable territory, however, which could ding your credit score.
If you’re in a bind, you might assume that a cash advance is the best and easiest way to borrow. I recommend avoiding them whenever possible, though — in 2024 and beyond.
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