Are Cash Advances Bad?

Cash advances are an expensive and potentially dangerous financial choice to be avoided in all but the direst circumstances. The benefit is quick cash, but the risks include elevated interest rates, fees and the potential for a debt spiral that could last years or decades.

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What Makes Cash Advances Bad?

The instant access to fast money that cash advances provide is almost never worth the associated consequences, which include the following. 

High Interest Rates

Cash advances come with high interest rates, even by credit card standards. According to Debt.org, the average cash advance APR is 24.22% as of March 6, compared to an already sky-high 20.09% for purchases.

Added Fees 

Credit card providers also charge a fee for tapping your credit line for cash. Citizens Bank reports the average fee as the greater of $10 or 3% to 6% of the amount borrowed.

Damaged Credit

Cash advances eat into your all-important credit utilization ratio, which accounts for 30% of your overall score, more than any category except payment history.

The more of your credit you utilize with a cash advance, the riskier you appear to lenders.  

Forfeiture of Special APRs

Many cards offer introductory 0% APRs for balance transfers and purchases, often lasting a year or more. These can be excellent debt-management tools, but many cards revert to the standard purchase APR for the entire balance after the account holder takes out a cash advance, which comes with an even higher rate, even if the introductory period hasn’t expired.

Is There a Good Way To Use a Cash Advance?

The only good use for cash advances is for small-dollar loans to manage critical emergencies when no other option is available.

Nearly all options are better than payday loans, which can hammer desperate borrowers with triple-digit APRs. If it’s that or a cash advance, choose the latter. 

👉 Best Cash Advance Apps

Alternatives To Cash Advance

Ideally, everyone would have emergency savings in an FDIC-insured, interest-bearing account to cover the unexpected expenses that compel people to turn to toxic debt, such as cash advances. However, not everyone has a rainy-day fund, but they should consider the following before treating their credit line like an ATM.

• Personal loan: According to the most recent St. Louis Fed data, the average personal loan rate is 11.65% — less than half the average APR for cash advances.

• Home equity loan or line of credit: The Wall Street Journal reports the average home equity loan rate is between 5.49% and 10.75%. CBS News reports the average HELOC rate is 7.18%, but HELOC APRs at credit unions like Navy Federal start at just 3.99% and max out at 18% — more than six percentage points lower than the typical cash advance rate.

• Margin loan: Another way to tap into equity is to borrow against your stocks with a margin loan, which typically offers lower interest rates than personal loans. They also offer flexible repayment options and don’t show up on your credit report.

• Balance transfer card: Several credit cards offer 0% introductory APRs for a year or more, which can provide quick access to money that you can use for just about anything.

• Borrow from loved ones: Money can strain personal relationships, but if you’re in good standing with a family member or friend who is willing to spot you some cash, there are few alternatives better than a free loan. 

• 401(k) loan: While potentially risky and rarely ideal, a 401(k) loan might be better than a cash advance because it doesn’t affect your credit and offers lower interest rates, which you pay back to your own account.

FAQs

What are the dangers of cash advances?

Cash advances against lines of credit come with elevated interest rates, often in the mid-20% range, fees, and offer no grace period for repayment, while increasing your credit utilization ratio.

What are better alternatives to cash advances?

Nearly anything but a payday loan is better than a cash advance. Options include personal loans, balance transfer cards, home equity loans and lines of credit, margin loans, borrowing from friends or family, or, if all else fails, a 401(k) loan.

Can cash advances hurt your credit?

Yes. While they don’t appear on your report as a separate loan or line of credit, cash advances do increase your credit utilization ratio by the amount of the advance.

Sources

• What Is a Credit Card Advance? Debt.org

• Finance Rate on Personal Loans at Commercial Banks, 24 Month Loan. Federal Reserve Bank of St. Louis

• Current Home Equity Loan Rates. Wall Street Journal.

• HELOC interest rates just fell again. Here are 3 advantages of opening one now. CBS News.