Why Are Cash Advances So Expensive?

Cash advances allow you to get quick cash from your credit card when you need it But they come at a steep price Cash advances have high interest rates, fees, and other costs that make them much more expensive than regular credit card purchases. Here’s an in-depth look at why cash advances are so pricey, and how you can minimize the costs if you need to take one out.

High Interest Rates

The biggest factor in the high cost of cash advances is the sky-high interest rate Cash advance APRs are nearly always considerably higher than the regular purchase APR on the same card

For example, your regular purchase APR may be around 18%. But your cash advance APR could be 25%, 30%, or even higher. Creditcards.com found the average cash advance APR across popular cards is over 25%.

This means the interest charges pile up very quickly on cash advance balances. With an APR of 30%, the daily interest on a $1,000 cash advance balance would be about $0.82 per day.

The interest starts accruing immediately when you take out the cash advance, with no grace period. Compare this to regular purchases, where you get a grace period of at least 21 days before interest kicks in as long as you pay your bill on time each month.

So cash advance interest can really add up, especially if you don’t pay off the balance quickly. A high cash advance APR magnifies the amount you end up paying back.

Transaction Fees

In addition to high interest, cash advances also come with transaction fees. There is usually either a flat transaction fee or a percentage fee on each cash advance, typically around 3-5%.

For instance, there could be a $10 flat fee or a $5 fee. Any amount over $300 in cash would be subject to a 15% transaction fee.

Some cards charge both a flat fee and a percentage of the amount you spend. When you get the advance, these fees are added to your balance right away.

No Grace Period

Regular purchases made with a credit card don’t charge interest for a certain amount of time as long as you pay your bill on time every month. But that grace period does not apply to cash advances.

Interest starts accruing on cash advances right away. Your credit card company will start charging you interest on the cash advance from the day you take it out.

This rule makes interest rates even higher because there is no interest-free grace period on cash advances.

Daily Limits

Credit card companies usually place limits on the total cash you can withdraw in a day, both for security and to limit their own risk exposure. The daily cash advance limit is typically a few hundred dollars.

So you may not even be able to get as much cash as you need in one day if you bump up against your card’s limit. This restriction can create problems if you were counting on a large cash advance to cover an emergency expense.

Higher Risk for Lenders

From the lender’s perspective, cash advances are riskier than regular credit card transactions. With a regular purchase, the lender gets payment from the merchant you bought from.

But with a cash advance, the lender has to front you the money without a direct product or service being purchased. There is more risk the cash advance balance won’t be repaid.

Lenders offset that risk by charging higher interest rates and fees on cash advances. The additional costs also serve to limit cash advance usage to emergency situations rather than everyday transactions.

How Banks Apply Payments

Before 2009, if your payment exceeded the minimum amount due, credit card companies would apply the excess amount to balances with the lowest APRs first. This minimized their own interest costs.

So higher APR balances like cash advances stuck around longer. Now, the 2009 CARD Act requires excess payments to be applied to highest rate balances first. This cardholder protection reduces the total interest you pay.

Faster Accumulation of Interest

Compared to regular purchases, interest on cash advances builds up more rapidly for several reasons:

• The APR is higher
• There is no grace period
• Transaction fees get added immediately

This faster interest accumulation results in greater costs for the borrower. You end up paying back far more than the amount of cash you initially received.

Fewer Consumer Protections

Cash advances don’t offer the same consumer protections as credit cards for regular transactions. Protections like:

• The ability to dispute fraudulent or incorrect charges
• The right to withhold payment for unsatisfactory goods or services
• The option to reverse payment if needed

So if you report an unauthorized cash advance transaction, it can be more difficult to get it removed from your account or receive credit for the funds.

How to Minimize Cash Advance Costs

While cash advances are very expensive, they can be a useful source of emergency funds if used carefully. Here are some tips to limit the costs:

• Take out only as much cash as absolutely necessary
• Have a plan to pay off the balance quickly
• Pay well over the minimum payment each month
• Compare cash advance rates between cards to find the lowest

The faster you can repay the balance, the less time interest has to accumulate and drive up the total repayment cost. Avoid cash advances unless absolutely needed, but follow these tips to reduce the expense if you must take one.

Alternatives to High-Cost Cash Advances

Because cash advances are so costly, you should consider other options whenever possible:

• Ask for an extension or due date change from creditors
• Borrow from family or friends
• Take out a lower-interest personal loan
• Transfer balances to a 0% APR card

While not always ideal, these alternatives can sometimes meet your short-term cash needs at a lower overall cost than an expensive credit card cash advance.

The Bottom Line

Cash advances allow fast access to credit card cash, but come with very high interest rates, transaction fees, and other costs. There is no grace period, so interest starts accruing immediately. These factors combine to make cash advances an extremely expensive way to borrow money. But in an emergency, they can be an option of last resort if used prudently. Take out minimal amounts, repay quickly, and search for lower-cost alternatives to avoid racking up excessive interest fees on cash advances.