Man holding a wallet with cash in it, Cash Advance.

What Is A Cash Advance?

Sarah Li Cain4-minute read
February 08, 2022

Sometimes money’s tight and you need cash right now.A cash advance will allow you to access a short-term loan with your credit card quickly.

A cash advance using your credit card might be the easiest and fastest solution to your short-term money problem. After all, you can head to the nearest ATM to access your money. However, these advances can get expensive fast.

Think through your options before deciding you need the cash right away and whether this method of borrowing money is your best choice.

How Does A Cash Advance Work?

Think of a cash advance as a way to get cold hard cash using your credit card. Basically, the cash advance definition is to secure a short-term loan through your credit card. Instead of making purchases with your card, you can purchase cash instead.

If you’re wondering how to get cash from a credit card, it’s simple. First, you’ll need to set up a PIN with the credit card issuer. After that, you can head to any ATM that accepts your credit card network (like Visa or MasterCard) and access cash that way, much like you would with a debit card. In some cases, you may be able to take your credit card to a bank in person and show your ID to get one. 

Cash advances work differently than regular purchases on credit cards. In many cases, your limit on cash advances is significantly lower compared to purchases.

In contrast to a payday loan, you will not need to fill out a separate application to obtain a cash advance. Payday loans are often accompanied by higher interest rates and are tied to your paycheck cycle. Usually, you have two weeks to repay your payday loan at an astronomical interest rate. This gets many borrowers into hot water fast.

Disadvantages Of A Cash Advance

With cash advance loans, you can fund your most pressing financial needs without filling out a loan application. You can simply head to the ATM or bank to collect your funds. This eliminates the worry of not being able to pass a credit check with a low credit score when you need funds immediately.

Plus, there are no strings attached to this money. You can spend the advance on whatever you need, but you’ll have to pay it back soon.

  • High Interest Rates: Cash advance APRstend to be higher, meaning you could pay more in interest for the privilege of borrowing money.
  • No Grace Period: Cash advances don’t come with the grace period you’d typically find with credit card purchases. That means as soon as you take cash out, you’ll be charged interest right away. 
  • Additional Fees: Depending on the issuer, there are also processing fees, and some banks may charge you an ATM fee.
  • Low Borrowing Limits: In many cases, your limit on cash advances are significantly lower compared to purchases — we’re talking a few hundred instead of a few thousand.

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Do Cash Advances Hurt Your Credit?

Using a cash advance doesn’t directly impact your credit score, but it could in indirect ways. For one, doing so means you’re now responsible for paying back a high-interest loan. If this affects your ability to manage existing debt, you could find yourself falling behind on payments. This can negatively impact your credit score.

A cash advance can also raise your credit utilization ratio — expressed as a percentage and calculated as your credit card balance against your credit limit. For example, you took out $600 and you have a $2,000 credit limit, so your credit utilization is 30%.

The higher your credit utilization, the more it can negatively impact your credit score since it shows lenders you could be a riskier lender. 

If you’re concerned about your credit, consider signing up for a free Rocket HomesSM account to take control of your credit. 

Alternatives To A Cash Advance

Although each of these options has its weaknesses, it could cost you less than a cash advance.

Apply For A Personal Loan 

Personal loans can be used for almost any purpose. These loans can be secured (where you’re required to provide collateral, such as your bank account) or unsecured. Interest rates tend to be lower and many don’t charge origination or application fees. If you need to borrow a larger sum of money, shop around and see what you can qualify for without affecting your credit score. 

Apply For A Cash-Out Refinance

If you own a home and have enough equity, you can refinance your home and receive cash based on the difference and applicable fees. Like all loans, this comes with its own unique risks, so be sure to check out how it works in detail before filling out an application. 

Borrow Money From Friends and Family

Depending on the loan amount, borrowing money from a friend could be an option. However, this might result in an uncomfortable situation, depending on your relationship. Make sure to consider the personal costs in addition to the potential to save on interest.

Overdraw Your Bank Account

For small amounts and if your bank allows, consider overdrawing your checking account. You’ll probably need to pay a fee, but the withdrawal is probably not subject to any interest.

Is A Cash Advance The Best Option For You?

Getting a cash advance using your credit card isn’t the most ideal situation, but it may make sense when you’re in a bind. As mentioned above, there are other options so weigh them all carefully before making a choice. If you do decide to use your credit card at the ATM, calculate how much a cash advance might cost you so you fully understand what you’re getting into.

Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.