Cash Advance
Definition
A cash advance is a service provided by credit card issuers that allows cardholders to withdraw a certain amount of cash against their credit limit, either through an ATM or over the counter at a bank or financial agency.
Detailed Explanation
A cash advance is a feature offered by many credit cards that enables cardholders to withdraw cash against their credit line. This service can be accessed at ATMs, banks, or financial institutions. Unlike regular credit card purchases, cash advances usually start accruing interest immediately, without a grace period. The interest rates on cash advances are often higher than those on regular purchases, making it an expensive way to borrow money.
Additionally, there are usually fees associated with the cash advance, such as a flat fee or a percentage of the amount withdrawn. These factors make cash advances a costly option that should only be used as a last resort.
While cash advances can provide quick access to cash in emergency situations, they do not offer the same consumer protections as credit card purchases, and should be approached with caution.
Example
John’s car breaks down unexpectedly, and he needs immediate cash to pay for the repairs because the garage does not accept credit cards. He uses his credit card at an ATM to get a cash advance of $500 to cover the cost.
Key Articles Related To Cash Advances
Related Terms
Annual Percentage Rate (APR): The annual rate charged for borrowing or earned through an investment, which represents the actual yearly cost over the term of a loan.
Credit Limit: The maximum amount of credit a financial institution extends to a client.
Interest Rate: The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the principal loan amount.
Overdraft: An extension of credit from a lending institution when an account reaches zero, allowing the account to have a negative balance.
FAQs
How does a cash advance affect my credit score?
Taking out a cash advance won't directly lower your credit score, but it can increase your credit utilization ratio, which is a factor in credit scoring.
Are there alternatives to a cash advance?
Alternatives include personal loans, borrowing from friends or family, or exploring overdraft protection if your bank offers it.
What should I consider before taking a cash advance?
Consider the high-interest rates, immediate accrual of interest, and fees associated with a cash advance, as well as how it fits into your overall financial strategy and ability to repay.
Editor: Colin Graves