What is a cash advance on a credit card, and how does it work?

How do cash advances work?

There are different ways to get a cash advance, including:

• ATM withdrawal: Most ATMs can be used to transfer money from a credit card, similar to using a debit card. The amount withdrawn is treated as a cash advance.
• Bank teller: Cardholders can visit a bank and request a cash advance in person. This involves presenting the credit card and a form of identification to the teller.
• Phone request: Some credit card issuers accept cash advance requests over the phone. The advance is then deposited into a bank account.

It’s important to note that the limit on cash advances is typically lower than the overall credit limit available for credit card purchases.

Credit card companies may also categorize other types of transactions as cash advances. These can include using a credit card for:

• Wire transfers or peer-to-peer (P2P) apps
• Monthly bills
• Payments on other debts, like auto loans
• Traveler’s checks
• Money orders
• Exchanging foreign currency
• Lottery tickets
• Gaming chips or other wagers

Fees and costs associated with cash advances

Cash advances on credit cards come with various fees and costs. Here are potential costs and factors to be aware of:

• Transaction fees: Most credit card issuers charge a transaction fee for each cash advance. This fee is often a percentage of the amount withdrawn, typically around 3-5%, or a flat fee, whichever is higher.
• Higher interest charges: The rate for cash advances is usually higher than the rate for regular credit card purchases. Regular purchases may have an interest-free grace period if paid off promptly, unlike cash advances.
• Lack of grace period: With cash advances, interest charges begin accruing the moment the cash is withdrawn. This makes them more expensive if not repaid quickly.

How much does a cash advance cost?

To illustrate how the cost of a cash advance can add up, here's an example of someone withdrawing $500 from an ATM using their credit card:

• Cash Advance Amount: $500
• Transaction Fee (5%): $25 (5% of $500)
• Daily Interest Rate (Example, 0.08%): Assuming a 29.2% APR, the daily rate would be approximately 0.08% (29.2% divided by 365 days).
• Interest Accrued (First Day): $0.40 (0.08% of $500)

If the cash advance isn't paid off immediately, interest will continue to accrue daily on both the $500 principal and the $25 fee. Over time, this can lead to a significantly higher repayment amount than the original $500 withdrawn.

Alternatives to credit card cash advances

There are different ways to access cash in an emergency. Here are some examples to consider.

Personal savings

Having a personal savings account can help provide a readily available source of funds. Building a safety net with a savings account is a prudent financial strategy. High-yield savings accounts, such as the PayPal Savings account, may be useful tools for helping grow savings as they offer competitive rates.¹

Emergency fund

An emergency fund is money set aside specifically for unexpected expenses such as medical emergencies or car repairs. Maintaining an emergency fund can serve as a financial safeguard, which may help avoid reliance on expensive borrowing methods like cash advances when unexpected expenses arise.

Money transfer services

Services which allow customers to transfer money quickly and securely can be a viable cash advance alternative if trying to move money between accounts or receive money from someone else.

Balance transfer card

With a balance transfer card, existing credit card debt can be moved to a new card, often featuring a low or 0% introductory Annual Percentage Rate (APR). This option may assist in reducing debt faster and saving on interest charges. However, be aware of potential fees and the interest rate after the introductory period.

Personal loan

A personal loan is a lump sum borrowed from a lender, repaid in fixed monthly installments. Used for various purposes like debt consolidation, rates depend on creditworthiness. They often have fixed repayment, potentially lower interest than cash advances, and may be secured as an online loan.

Borrow money from friends or family

Borrowing from friends or family offers a less formal way to get funds. Clear communication, a written agreement, and a repayment plan are crucial to avoid misunderstandings and maintain relationships. Upholding agreed-upon terms and timely repayment are essential.

Manage money with PayPal

Taking control of finances is easier when the right tools and information are accessible. When considering credit and financial needs, it's beneficial to look at available credit solutions beyond cash advances to see what may be best.

Learn more about how PayPal's credit card options can help you manage your money for your financial situation.²