Almost 190 million Americans have a credit card and they will make about 30 billion transactions in 2018.
Sometimes, however, cash is still king.
If you don’t need actual greenbacks, you may need a quick loan that acts like a cash infusion. Since so many people have credit cards, that’s often the first place they turn to get that cash advance.
Is that a good idea?
If you’re strapped for cash, you may not have a choice, but you need to be aware of the pitfalls that come with getting a cash loan advance. Here are some things to know.
What exactly is a credit card cash advance?
Cash advances are short-term loans that do the job when credit cards aren’t accepted. They are quick-fix solutions for financial emergencies.
They also could be used if you don’t have enough money in your checking account or your paycheck is coming in late or is less than usual and you need money to pay a bill immediately.
You can get cash advances from banks, ATMs or, if the situation is really desperate, payday lenders. Cash advances are easy to obtain in most areas and can be a good, short-term solution, but they carry considerable risk if you can’t pay them back quickly, or if you get in the habit of using them too often.
How do I get one?
Ironically, you need a credit card to start the process for getting a cash advance at a bank or ATM. Present your credit card at a bank and in most cases, you can receive the amount available on your cash credit line, which is determined by your balance and how many purchases you’ve made. The same is true at an ATM, where you will need your credit card and a pin number.
While you think cash advances might be part of a regular bank or ATM transaction, they are not. Banks apply severe transaction fees and interest rate charges for this service.
Are there other loan options?
Yes, and some are worth considering. Others, not so much. Some other choices you can make include:
- Peer-to-peer loan. These loans are given online directly from individuals, investors or businesses. Companies like LendingClub match borrowers with lenders. LendingClub facilitated $33 billion in loans in 2017, but as always, beware of what’s in the fine print. In May of 2018, The Federal Trade Commission accused LendingClub of misleading consumers with hidden fees and continuing to charge borrowers after they had paid off their loans.
- Personal loan from bank. If you are in good credit standing with your bank, take advantage of it. A personal loan will probably be cheaper than a credit card advance, so the payoff will be faster.
- Roth IRA. Technically, you can’t borrow money from your retirement fund. But there is a sneaky way to get a quick cash infusion. When you withdraw money from an IRA, you have 60 days to deposit in another Roth IRA. So, if you’re certain you can do that, you can use the money as you wish for 60 days. If you fail to re-deposit it in that time, you’ll get hit with a 10% early withdrawal penalty.
- 401(k) loan. You can borrow up to $50,000 or half the balance of your account, whichever is less, from your workplace savings plan. You then repay the money, plus interest, into your account. The danger is that if you leave your job you are subject to a 10% early withdrawal penalty if you don’t repay whatever you borrowed. You used to have only 60 days, but that changed under the tax reform bill that went into effect Jan. 1, 2018. Now when you leave a job, you have until October of the following year to put the money back into your 401(k) or IRA.
- Convenience checks. These are the blank checks your credit card company sends you. They are linked to your account and you can write a check to yourself and cash it. The drawback is convenience checks are generally treated as cash advances, not credit card purchases. So you’ll get socked with a higher interest rate and pay additional fees.
- Payday loan. This is a slightly better option than robbing a bank, but not by much. A lender advances you money that usually must be repaid in two weeks. You generally have to write a post-dated check for the full balance, plus fees, or authorize the lender to electronically debit funds from bank account. If you fail to repay the loan in time, the lender can cash the check or withdraw the money. A typical two-week payday loan charges $15 for every $100 borrowed. That works out to an annual APR of almost 400%, though they sometimes run as high as 5,000%. Yes, 5,000%! That’s why the payday loan industry has a loan-shark reputation and you should avoid it unless you’re only other option is bank robbery.
Do Cash Advances Impact Credit Reports?
Credit reporting companies do not include cash advances on your report, so your score will not be directly affected. There a big “but” however.
A cash advance comes with high interest rates and fees. If you don’t pay it off quickly, those interest rates will cause your balance to balloon. The more in debt you are, the harder it will be make payments.
The increased balance will also impact your credit utilization ratio, which accounts for 30% of your credit score.
What Are Payment Allocation Rules?
They are the fine print rules that allow lenders to wring as much money out of you as possible. Your credit card balance has different rates based on the type of purchases you’ve made.
Issuers want to apply your payments to the balance with the lowest rate, which means higher-rate balances will decrease more slowly and incur more interest.
Federal law requires credit card issuers to apply the minimum monthly payment to balances with the highest interest rate. But anything you pay above the minimum can be applied at the lender’s discretion, and it’s usually applied to the higher-rate balances.
Can you get a cash advance online?
Yes, but you probably don’t want to.
The online lending industry is getting the same reputation as the cash-advance business. Interest charges aren’t as ridiculous, but there’s been enough consumer abuse to warrant government action.
Online companies don’t give you actual cash. They electronically transfer funds into your bank account. It’s similar to payday loans, but you’re not always required to make a single repayment on payday.
Some lenders were charging triple-digit interest rates, charging interest during grace periods and selling personal information, which prompted the state of Virginia to crack down on the industry in 2017.
The state attorney sued Opportunity Financial over improper fees charge to 2,400 Virginians. Another lender, CashCall, had to repay $15.3 million to about 10,000 customers.
Reforms have been proposed that will cap interest rates at 36% on consumer loans between $500 and $35,000. That’s still a pretty hefty interest charge and another reason to leery of online lending.
What’s the Bottom Line on Cash Advances?
Credit card cash advances are useful in a pinch but have so many drawbacks that your best strategy is stay out of a pinch.
A lot of consumers have found help through debt consolidation programs. Counselors work with lenders to reduce your interest rates, then your bills are combined into one monthly payment.
But if you need that emergency infusion of cash, be sure to read the fine print. A 2017 survey by CreditCards.com found the average APR on a cash advance was 23.68%, which was almost eight points higher than the standard interest rate.
Cash advances are undoubtedly a quick solution. But if you’re not careful, your financial problems will only get worse.