Nearly one in four Americans don’t have an emergency fund, according to Bankrate. If you’re among those without enough cash on hand to cover an unexpected expense, you may be tempted to use a credit card cash advance as a quick solution. But you’ll pay for the convenience in high interest and fees.
A cash advance is a short-term loan from your card issuer, allowing you to borrow against your card’s credit limit, with no collateral required. You can typically get the cash at an ATM or a local bank branch. How much you can withdraw depends on your card issuer’s rules. Cash advances may be capped at a few hundred dollars or about 30% of your card’s credit limit.
You’ll pay an up-front fee, usually the greater of about $10 or 3% to 6% of the transaction amount. Interest accrues immediately; there’s no interest-free grace period, which most credit cards offer on standard purchases. And the cash-advance interest rate — often in the range of 25% to 30% — is usually higher than the rate that applies to purchases, says credit expert Gerri Detweiler.
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Alternatives to a credit card cash advance
Not only do cash advances hit your wallet, they can also hurt your credit score. When you take out a cash advance, the unpaid balance counts toward your credit-utilization ratio — the percentage of available credit that you’re using on your credit card. If your utilization ratio rises because of the cash advance, your credit score may drop.
As an alternative to a cash advance, try asking your bank or credit union for a low-cost loan to help cover emergency costs, Detweiler suggests.
Another option: Open a credit card with a 0% introductory rate on purchases. The Wells Fargo Reflect card, for example, charges no interest for 21 months.
But if you take this route, be sure to pay off the balance before the 0% window closes. After that, you’ll likely owe double-digit interest on any remaining balance.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.