How Does a Credit Card Cash Advance Work?

Banks make it exceptionally easy to obtain cash loans on the credit cards they issue. While such advances may be a quick and convenient way to obtain ready cash, there are high costs associated with the process. Unless cash is required for the intended expense, these credit card advances should be limited to emergency situations only.

Methods of Obtaining Cash Advances

• Obtaining cash from a credit card is similar to using a debit card. The cardholder travels to the nearest ATM, enters a few numbers and immediately receives the requested amount in money. The difference is that debit cards withdraw the funds from the borrower's own checking account. Cash advances via credit card are drawn from the customer's line of credit and must be repaid with interest.


• Along with the customer's monthly credit card statement, banks often provide a few blank checks, which they encourage the recipient to use for convenience.  If and when they are cashed, these checks are actually cash advances made on the customer's credit card.

The Downside of Cash Advances

• The interest rate charged for cash advances is several points higher than that for purchasing goods and services with a credit card.


• In addition to the interest rate, a fee is also charged. These fees average $10 to $20 per transaction.


• If the money is withdrawn from a bank other than the one issuing the credit card, that institution will also charge a fee for the convenience that they provide.


• Unlike the purchase of goods and services, which have a grace period, interest on cash advances is charged from the moment of the transaction.


• Making monthly payments rather than paying off the card balance when each statement is received poses an additional problem.  Some banks require that the balance for items purchased be paid before applying any of the payment made towards a cash advance balance. Since the cash advance carries a significantly higher interest rate, the borrower making payments is charged even more for the loan.

When a Cash Advance Makes Sense

Some businesses accept only cash. Should an emergency occur where cash is required, an advance might be a good idea. If it is paid off when the monthly credit statement is received, borrowing costs can be kept to a minimum.