What Is a Cash Advance Fee?

Credit card and finance companies have long offered an interesting, if not controversial, method for obtaining cash in a pinch. Cash advances, despite their reputation for high cost and excessive fees, continue to be an option available to virtually every card holder with a major credit card. This article will explore how these advances work, the basis for their reputation, some benefits to their use, and some considerations one must keep in mind when taking a cash advance.

Function

Obtaining a cash advance from a credit card is somewhat like a hybrid of a credit card purchase and a typical automatted teller machine (ATM) transaction. When a card holder needs extra cash--for whatever reason--she simply inserts her major credit card into an ATM machine on the same network, enters a predetermined personal identification number (PIN), and withdraws cash. The ATM processes the transaction in much the same way as a typical withdrawal, verifying the availability of funds with the cardholder's bank before dispensing cash. In a cash advance scenario, however, the transaction amount is not debited from the cardholder's bank account but, instead, charged to her credit account for payment at a later date.

Types

Virtually every major credit card--Mastercard, Visa, Discover, American Express--as well as some smaller and private label, cards offer cash advance options. These cash advances may be taken from any ATM with access to the credit card network; these machines can be identified by matching the logo on the back of the card (some common networks include Star and Plus networks) with the logo displayed on or near the ATM.

Geography

Due to the global nature of financial networks, cash advances can be obtained from virtually anywhere in the world where ATM access is available. American card holders, for example, may be able to obtain a cash advance from a compatible ATM in Europe, Asia, Africa, Australia or virtually any other point on the globe. Some card issuers, however, may charge an additional fee for international transactions, compounding the expenses already associated with the cash advance.

Warning

Despite their convenience and ability to help cash-strapped cardholders in a pinch, cash advances have earned a reputation as one of the most expensive financial transactions into which a credit card holder can conceivably enter. According to credit card experts at Credit.com, financial institutions often charge an up front cash advance fee of two to four percent (2 percent to 4 percent) of the cash advance amount. In addition, cash advances accrue a significantly higher interest rate than traditional credit card purchases, sometimes with an annual percentage rate (APR) approaching 30 percent. Unlike traditional purchases, this rate is charged beginning on the day of the cash advance, allowing no grace period for repayment. Finally, financial institutions often credit payments toward lower interest rate charges first, making the cash advance difficult to pay off for holders of large credit card debts. When all factors and fees are considered, cash advances may cost the borrower hundreds of dollars more than the original advance amount.

Prevention/Solution

For finance-savvy card holders, there may be some alternatives to taking cash advances from high-fee and high-interest credit cards. One possible solution may be to set aside an "emergency fund" in a separate, untouched bank account. When needed, this fund may be tapped through use of a bank-issued ATM or Debit card; since these cards often work across the same financial networks that handle credit card transactions, these emergency funds would be just as accessible as credit card cash advances, only without the additional fees and interest rates.

Resources

• Credit.com Page on Cash Advance Fees