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BY JULIA KAGANWhat is a Cash AdvanceA cash advance is a short-term loan from a bank or an alternative lender. The term also refers to a service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash. Cash advances generally feature steep interest rates and/or fees, but they are attractive to borrowers because they also feature fast approval and quick funding.BREAKING DOWN Cash AdvanceTypes of Cash AdvancesThere are a variety of cash advances, but the common denominators among all of them are the stiff interest rates and fees.Credit Card Cash AdvancesThe most popular type of cash advance is borrowing on a line of credit through a credit card. The money can be withdrawn at an ATM or, depending on the credit card company, from a check that is deposited or cashed at a bank. Credit card cash advances typically carry a high-interest rate, even higher than the rate on regular purchases: You’ll pay an average of 24% – about 9% higher than the average APR for purchases. What’s more, the interest begins to accrue immediately; there is no grace period.These cash advances usually include a fee as well, either a flat rate or a percentage of the advanced amount. Additionally, if you use an ATM to access the cash, you often are charged a small usage fee.Along with separate interest rates, credit card cash advances carry a separate balance from credit purchases, but the monthly payment can be applied to both balances. However, if you are only paying the minimum amount due, the card issuer is allowed by federal law to apply it to the balance with the lower interest rate. As that is invariably the rate for purchases, the cash advance balance can sit and accrue interest at that high rate for months.In most cases, credit card cash advances do not qualify for no- or low-interest-rate introductory offers. On the plus side, they are quick and easy to obtain.Merchant Cash AdvancesMerchant cash advances refer to loans received by companies or merchants from banks or alternative lenders. Typically, businesses with less-than-perfect credit use cash advances to finance their activities, and in some cases, these advances are paid for with future credit card receipts or with a portion of the funds the business receives from sales in its online account. Rather than using a business’ credit score, alternative lenders often survey its creditworthiness by looking at multiple data points, including how much money the merchant receives through online accounts such as PayPal.Payday LoansIn consumer lending, the phrase “cash advance” can also refer to payday loans. Issued by special payday lenders, they can range anywhere from $50 to $1,000, but they come with fees (around $15 per $100 borrowed – or even more in some cases) and interest rates exceeding 100%. Rather than taking into account the borrower’s credit score, the lender determines the amount of the loan based on local state regulations and the size of the applicant’s paycheck. If the loan is approved, the lender hands the borrower cash; if the transaction takes place online, the lender makes an electronic deposit to the borrower’s checking or savings account.The loans are extremely short term – they must be paid back on the borrower’s next payday unless he or she wishes to extend the loan, and in that case, additional interest is charged. Unfortunately, many do: More than 80% of all payday loans are rolled over within 30 days of the previous loan, according to a 2016 study by the Consumer Financial Protection Bureau (CFPB).The process can be quick, if more complex, than securing a credit card cash advance. To obtain a payday loan, you write a postdated check made out to the payday lender for the amount you plan to borrow, including the fees. The lender immediately issues the borrowed amount but waits to cash your check until the payday arrives. Some electronically minded lenders now have borrowers sign an agreement for automatic repayment from their bank accounts. Lenders usually ask that you provide personal identification and proof of income when you apply.Some employers offer payday loans or advances on paychecks as a service to their employees. Terms vary, but often no fees or interest are charged.Do Cash Advances Hurt Your Credit Score?Taking out a cash advance has no direct impact on your credit or credit score, but it can affect it indirectly in various ways.First, if you take the advance using a credit card, it will raise your outstanding balance, which will raise your credit utilization ratio, a measure that credit scoring models use to calculate your score. If you owe $500 on a $1,500 limit card, for example, your credit utilization ratio is 30%. However, if you take out a $300 cash advance on that card, the balance will jump to $800, resulting in a credit utilization of more than 53%. High utilization rates are a big indicator of credit risk; when your ratio exceeds 40%, it can adversely impact your credit score.As noted earlier, a cash advance usually has a high-interest rate. If this affects your ability to pay the monthly charges promptly, that also could affect your credit score. And if the cash advance puts you over the card’s credit limit, your credit score can be dinged. Even after the balance is paid down, your credit report will show the highest balance reported, and other potential lenders will see that you were over the limit at one point, which could hurt your ability to get new credit.Cash Advance Pros and ConsA credit card cash advance could be a reasonable option for someone who has an emergency need for money and limited resources for getting it, especially when that person has a clear and reasonable plan for paying back the money in a short time period. It is, for example, a better option than a payday loan or a car title loan, due to the exorbitant triple-digit interest rates those loans typically carry and the greater payoff flexibility that comes with credit card debt.But cash advances would be a bad idea under these conditions:Just before declaring bankruptcy – New credit card debt does not magically disappear in a bankruptcy. Your creditors and a judge will examine your debts, including the dates and types. Once you know or have a strong inclination that you’ll soon file for bankruptcy, credit card use of any kind may be considered fraudulent. A cash advance immediately prior to filing is very likely to be challenged by the card issuer, and that account may be excluded from the debts that are forgiven in a bankruptcy.To pay a credit card bill – A cash advance is a very expensive way to pay bills, and the risk of falling into revolving debt cannot be ignored. The potential to pay many times the amount of the original advance (in interest charges) is very real. Furthermore, in addition to the higher interest rate, there are those additional fees that everyday credit card purchases are not subject to.To buy something you can’t afford – Going into debt to satisfy a desire is not just financially dangerous; it’s emotionally detrimental. A person who thrives on immediate gratification and the temporary emotional lift of a big purchase will eventually feel regret (and possibly depression, anxiety, stress, and other debilitating emotions) when faced with the debt. The more compulsive the purchase, the more pronounced the regret.The Bottom LineCash advances aren’t alarming when used infrequently, but they are at best short-term solutions to meet emergencies. If they are becoming a habit, or if you find you regularly need a cash advance to make ends meet, then drastic budgeting and spending changes are in order.I guess that it is fair to say that cash advances more risky for the issuer than any other purchase, as can be seen in the answer below, it can cause great loss:Everyone hits an unexpected bill or expense now and then — a car breaks down, an air-conditioner fails during a heat wave, a relative needs medical care.While it may be tempting, one source of emergency cash that should be used sparingly, financial advisers say, is a credit-card cash advance, which is an expensive way to borrow money.“Cash advances are almost always a bad idea,” said Michael Sullivan, a personal financial consultant in Phoenix with Take Charge America, a nonprofit credit counseling agency.The average interest rate for a cash advance on a credit card is nearly 24 percent, compared with an average of about 16 percent for purchases, according to a new analysis by the card comparison site Credit Cards - Compare Credit Card Offers at CreditCards.com.Unlike with purchases, cash advances have no grace period: Interest starts accruing right away, as soon as you borrow the money.And most cards charge an upfront fee for cash advances — typically, either $10 or 5 percent of the advance, whichever is higher.Say you buy a $1,000 item on a credit card with a 15.79 percent interest rate and pay the balance off within 30 days. In this case, you would pay no interest because of the grace period.But a $1,000 cash advance will typically cost you nearly $70, even if you pay the debt down in 30 days (based on an upfront $50 fee, plus $19.73 for 30 days of interest at 23.68 percent).Given the cost, using a card advance makes sense only if the other alternatives — such as a payday loan or car title loan, which can carry triple-digit annual percentage rates — are even worse, said Matt Schulz, the senior industry analyst at Credit Cards - Compare Credit Card Offers at CreditCards.com.Cash advances include withdrawals at A.T.M.s using a credit card. They may also include so-called convenience checks — paper checks mailed to consumers that allow them to draw on their credit card.Using a card to “buy” cash — whether it’s a foreign currency for travel, or casino chips while visiting Las Vegas — is also considered a cash advance by default, Mr. Sullivan said. So it’s wise to make sure you understand the terms of your card to avoid unexpected charges. “You can inadvertently get a cash advance if you’re not careful,” he said.If you do take out a cash advance, Mr. Schulz said, make it a priority to pay off the balance. If you submit only the minimum monthly payment on your card, it will be very difficult to get rid of the costly debt, because most card issuers apply for minimum payments first to lower-rate balances, before applying for any extra payment over the minimum to higher-rate balances.“The quicker you can pay it off, the better,” Mr. Schulz said.For its report, Credit Cards - Compare Credit Card Offers at CreditCards.com analyzed a representative sampling of 100 credit cards from major United States issuers in April. It drew information from the terms-and-conditions documents, publicly available cardholder agreements and phone calls to issuers.The survey found the highest cash advance rate in the First Premier Bank credit card (36 percent), followed by the BP Visa, the Texaco Visa and the Exxon Mobil SmartCard (all about 30 percent), and the Shell Platinum MasterCard (28 percent).Gas and retail cards tend to carry higher rates, Mr. Schulz said, because they are often easier to qualify for, so they are considered riskier.Here are some questions and answers about cash advances:Do cash advances earn rewards points?No. Cash advances generally are not eligible to earn credit card rewards, Mr. Schulz said.Before getting a cash advance, you should have an internal debate with yourself to decide if it is the best thing to do, and if you really want to go through with it. Below, I am going to include some reasons why this may not be the best thing to do.Reasons Why You Should Avoid a Cash AdvanceBy Debra PangestuWhen you’re in a financial bind and in need of quick cash, taking a cash advance on your credit card may sound like a convenient way to get money; but there’s a price to pay for the convenience, and in the long run it is usually in your best interest to avoid a cash advance if possible.What is a Cash Advanceyou have to is walk up to an ATM machine, a financial institution, or use a convenience cheque provided by your credit card company, and you’ll have some cold hard cash in your hands. Your advance will be charged to your credit card almost like a regular credit card purchase, which you’ll pay off when you can.Although a cash advance on your credit card is certainly easy and convenient, there are higher costs that go along with this form of borrowing which can end up costing you a lot more than you bargained for.If you’re considering getting a cash advance in Canada, we’ve outlined some important things you should be aware of, as well as some alternative options worth considering.There’s Almost Always an Upfront Cash Advance FeeWhen you take an advance on your credit card, there’s almost always a cash advance fee you have to pay up front (you can see the cash advance fees that various Canadian credit cards charge here). A lot of consumers often wonder how to avoid cash advance fees, but unfortunately, there’s no way around it (except if you get a low-interest rate card that doesn’t charge cash advance fees, but there aren’t a lot of these). How the convenience fee is calculated depends on your credit card provider; you may either pay a percentage of your transaction (often 1%) or a flat dollar amount (typically $2 or $3.50). If you take money from an ATM that is not part of your bank or credit union’s network, don’t forget that you’ll have to pay an ATM fee on top of the cash advance fee too.Interest Rates Are Higher for Cash AdvancesMany people are under the impression that a cash advance is treated the same way as everyday purchases, but this usually isn’t the case.On top of the cash advance service fee, you’ll also be charged a higher interest rate. Credit card companies often charge higher rates for cash advances than for purchases for two reasons:Cash advances are a credit card convenience service a lot of people are willing to pay more for.Using cash advances can potentially reflect desperation or and greater financial risk for the credit card company.The cash advance interest is sometimes 5% to 8% higher than the normal rate charged for purchases, so if you’re paying 16% interest on your credit card purchases, you could pay up to 24% on your cash advance. Getting dinged 24% just to borrow money is a high price to pay, so before you take out a cash advance, ask yourself whether you’ve exhausted all your other options, which we’ll discuss in a bit.Cash Advances Don’t Have a Grace PeriodCredit card purchases have a grace period in which you’ll have about a month to pay back the money you borrowed interest-free. However, most cash advances don’t have a grace period, and interest will start to accrue the same day you take your advance.So, if someone were to take out an $800 cash advance on a credit card with a 1% cash advance fee and a 24% interest rate, and were to pay the amount back in 10 days, they would be charged $13.26 for borrowing the money (an $8 fee plus $5.26 in interest). This may not seem like a lot, however, borrowing $800 for 10 days for $13.26 works out to a 60% annual interest rate. Ouch!Quick Cash Can Facilitate Harmful Financial BehavioursWhile cash advance fees may be high, they’re not the most dangerous part of cash advances. In the example we just gave, someone may have used the $800 to help cover their rent and didn’t have the money to pay this off until they got their tax refund a year later. In this case, they would end up paying $200 in interest over the year. If things were tight before, it’s not like this person can really afford to give up $200. Being short $200 now can lead to more high-interest borrowing, being short even more money, and result in even more expensive borrowing. You can see here that cash advances can act as a series of dominos that can begin to fall and potentially create a downward spiral that is hard to get out of.A credit card cash advance is a convenient way to gain access to funds, but in reality, this “easy money” is often only a quick fix to an underlying financial problem. Until we can remedy that problem, the borrowing cycle will likely continue, and it can spiral into financial problems in the future.We often turn to cash advances and credit because we don’t know how to budget, how to save money, and how to live within our means. The more accustomed we are to getting cash advances during times we need money – whether it’s to cover the costs of an emergency or to pay rent – the less likely we are to learn how to responsibly manage our finances.Although it may not seem like a big deal to take out a cash advance every now and then, if something unexpected happens – a job loss, an illness, or a major car repair – you can really get caught in an expensive borrowing cycle. As the interest rates and services fees accumulate, you’ll soon find yourself owing more than you can manage and before you know it, you’ll be digging yourself deeper into debt.If you find that you consistently need cash advances to pay your bills and make ends meet each month, this is a big red flag that signals you need some help to work things out and get your finances back on track. This is what our Credit Counsellors help people with every day.Cash Advances Can Unintentionally Trigger Higher Credit Card Interest RatesCredit card companies pay attention to cash advances and some appear to view frequent use of them as a potential sign of financial problems. Many credit card companies are so concerned that they have now cut back their client’s cash advance limits so that many people now have a separate cash advance limit that is lower (often half) of their regular credit limit.Cash Advances Can Unintentionally Trigger Higher Credit Card Interest RatesCredit card companies pay attention to cash advances and some appear to view frequent use of them as a potential sign of financial problems. Many credit card companies are so concerned that they have now cut back their client’s cash advance limits so that many people now have a separate cash advance limit that is lower (often half) of their regular credit limit.Some credit card companies also monitor at what time of the month you make cash withdrawals from your credit card and compare that to when you make the monthly payment on your card. If you make your payment within 72 hours of withdrawing cash from your credit card, they can assume you are using this money to make the card’s minimum payment. This can be interpreted as a sign of financial problems and increased risk to the credit card company. In response, some credit card companies can raise their cardholder’s interest rate to presumably help offset the increased risk.Some Cash Advance AlternativesCash advances are an expensive way to borrow money, and if you’re not careful, you could find yourself paying more than what you bargained for. When you need cash in a pinch, there are other alternatives that may make more financial sense. Here are some to consider:Use your credit card. If you need to pay a bill or make a purchase if it’s possible to put it on your credit card instead. You won’t pay an upfront fee, your interest rate will be lower, and you’ll have your normal 1-month grace period to pay back the balance interest-free. If putting a purchase on your credit card isn’t an option – let’s say you’ve reached your limit – ask a friend or family member if they can put the purchase on their credit card, and commit to paying it off in 30 days or less.Ask for a cash loan from your family or close friends. If credit cards aren’t an option, it may be time to swallow your pride and ask someone you know and trust for a cash money loan. But, it’s also important to keep in mind that money can affect relationships, and if you don’t make good on your promise to pay back the loan on time, that relationship can be damaged.Get a personal loan from a bank or a credit union. The only downside with this is that you’ll need good credit to qualify for an unsecured loan with a reasonable interest rate. If your credit isn’t in great shape or if the bank requires some form of security or collateral that you don’t have, then this won’t be an option.Ask for an advance on your paycheque. If you and your employer have a good relationship, they may be able to give you an advance on your next paycheque, and you’ll simply have to pay back the advance on the following payday. All workplaces vary, so depending on where you work, they may have established policies in place. A smaller business may be able to work something out, but larger employers may have policies and procedures to adhere to. Whatever the case, it certainly doesn’t hurt to ask. But just like borrowing money from your friends or family money, be cautious that you don’t make a habit of it.You could also potentially generate some cash by selling some of your stuff on Craigslist, holding a yard sale, getting a second job, renting out a room in your home, renting out space in your garage, or any number of other creative ways of generating some extra cash. You can start applying as many of these savings tips as possible to free up some cash. To find more money to work within the future, you can also look in all of these places to find more money.If you’ve weighed your options and you believe getting a cash advance is still the best option for you in your current situation, make sure you know what the interest rate is and how much you’ll be paying in fees. It’s also important that you get a cash advance only for the amount you need, and that the card you’re taking the advance on has a low balance. If you use too much of your available credit, this affects your credit utilization which in turn will reduce your credit score. Lastly, it’s imperative that you pay back the cash advance the soonest you can because interest starts to accrue the moment you take out the money.The Bottom Line on Cash AdvancesThere are times when a cash advance may be necessary, like when you’re away on holiday and the pharmacy that sells the medication you need only accepts cash and your bank card won’t work. Cash advances should only be used in emergencies, and they shouldn’t be used on a regular basis. It also shouldn’t be your lifeline when an emergency strikes, because once you get into the cycle of high-interest borrowing, it can be difficult to get back out.If you’re relying on advances to meet your day-to-day expenses, it’s time to take a good look at your finances and start to make changes. The best thing you can do to avoid taking a cash advance is to plan ahead, create a spending plan, find ways to reduce your expenses, possibly look for ways to increase your income, and start setting money aside in an emergency fund. That way, if you find yourself in a tough spot down the road and you need cash quickly, you’ll have a pool of money you can dip into without any penalty or high costs that set your finances back.Knowing how to manage your money well makes a huge difference, and our accredited, non-profit credit counselors can help you get started. They’ll go through your finances with you, and they’ll also help you put together a realistic budget so you can start living within your means and save money so you can avoid a cash advance in the future.<< Back to the Blog main pageSubmitted by RichardI have tried to provide enough information that you would have a lot to unpack, but also find the information that you are looking for. Thanks for your uestion