Understanding Cash Advances and Exploring Better Alternatives

At O1ne Mortgage, we prioritize consumer credit and finance education. We aim to provide you with the best information to make informed financial decisions. If you have any mortgage service needs, feel free to call us at 213-732-3074. In this blog, we will discuss cash advances, why you should avoid them, and explore better alternatives.

Can You Turn Off Cash Advances on a Credit Card?

A cash advance allows you to withdraw cash against your credit limit at a bank, credit union, or ATM. While it can be an attractive option during a financial emergency, it comes with high costs. For instance, you might consider a cash advance to pay an overdue utility bill to prevent service disconnection. However, the interest and fees can quickly add up, making it a costly option.

If you’re concerned about the potential financial harm of cash advances, you might want to disable this feature on your credit card. Start by contacting your card issuer to explore your options. Some issuers may allow you to disable cash advances entirely or set a minimal cash advance limit, such as $1.

Why You Should Avoid Cash Advances

While cash advances can be helpful in a pinch, they come with several drawbacks:

High Annual Percentage Rate (APR)

Many credit cards charge significantly higher interest rates for cash advances than for purchases. According to the Federal Reserve, the average credit card interest rate in January 2024 was 22.75%, but cash advance rates are typically much higher.

No Grace Period

Unlike regular credit card purchases, which often come with a grace period of at least 21 days, cash advances start accruing interest the day you withdraw the funds.

Cash Advance Fee

Credit card companies typically charge a cash advance fee, usually between 3% and 5% of the amount borrowed. This means you’ll pay $3 to $5 for every $100 you borrow, with a minimum fee of around $10.

ATM or Bank Fees

In addition to the credit card issuer’s fee, many financial institutions and ATM owners charge a separate cash advance fee, usually between $2 and $5.

To illustrate the costs, let’s say you take out a $1,000 cash advance at a 25% APR and make a minimum monthly payment of $31. It would take you 55 months (four years and seven months) to pay off the balance. In total, you’d pay $676 in interest, a $50 cash advance fee (5%), and a $3 bank or ATM fee. Borrowing $1,000 would cost you an additional $729, roughly 73% more, if you only make minimum payments.

Alternatives to Costly Cash Advances

Given the high costs associated with cash advances, consider these alternatives:

Emergency Fund

Financial experts recommend saving three to six months of living expenses in an emergency fund. If you have any savings built up, use these funds before resorting to a costly cash advance. After all, an emergency fund is intended for such situations.

Friends and Family

Borrowing from loved ones can be more cost-effective than a cash advance, but it could strain your relationship if not handled carefully. Agree to written terms detailing when and how much you’ll repay to avoid misunderstandings.

Due Date Extension

If you’re considering a cash advance to pay an impending bill, such as a utility bill, ask the company if you can extend your due date. You might also request to change your due date to align with your paycheck schedule.

Personal Loan

A personal loan can help you navigate a financial rough spot. While you’ll still pay interest, personal loan APRs are usually lower than credit card rates, especially compared to cash advance rates. Consider consolidating high-interest debts into a lower-interest debt consolidation loan.

0% Introductory APR Credit Cards

If you have good credit, you might qualify for a 0% introductory APR credit card. This allows you to make purchases without paying interest for a specific period, typically 12 to 21 months. Ensure you pay off the debt before the introductory period ends to avoid high-interest rates.

A Cash Advance Could Indirectly Affect Your Credit

While a cash advance doesn’t directly impact your credit score, it is included in your credit card debt. This could negatively affect your credit score by increasing your credit utilization ratio, which represents the percentage of available revolving credit you’re using. This ratio is a crucial factor in your credit scores.

Strengthening your credit can help you qualify for lower-interest loans in the future. Start by accessing your credit report and score for free to get an overall picture of your credit. Then, take steps to improve your credit quickly.

At O1ne Mortgage, we are committed to helping you make the best financial decisions. If you need any mortgage services, don’t hesitate to call us at 213-732-3074. We are here to assist you with all your mortgage needs.