Is This the Worst Way to Use Your Credit Card?

Image source: Getty Images

The most common way to use a credit card doesn't require much explanation. You can use your card to make purchases in person, or you can manually type in its information on an e-commerce website to buy something online.

You can also use your credit card to get access to cash via an ATM -- but is this a good idea? Let's take a closer look at cash advances, how they work, and why they are best avoided.

What's a cash advance?

A credit card cash advance is a way to take cash out of your card. It counts toward your credit limit (which isn't to say you'll be able to access that entire limit; more on this below). You'll be able to use a cash advance PIN (available from your card issuer) to take cash out of an ATM. You might also be able to use a convenience check provided by your credit card issuer (sometimes these will come in the mail with a new card) and basically write a check on the cash advance limit.

Some purchases with your credit card are coded as cash advances, such as lottery tickets ( Pro Tip: Don't use your credit card to gamble), money orders, and some gift cards. If something you're buying could potentially turn into cash, your card issuer may treat the transaction as a cash advance.

Why is a cash advance a bad idea?

Let's start with the cost of a cash advance. For starters, you'll be charged a fee to take out a cash advance -- according to Experian, cash advance fees commonly amount to 5% of the amount you take out or $10, whichever is greater.

Plus, you'll likely be charged a higher APR on a cash advance than you would for using your credit card as a payment method. I checked this on one of my credit cards and found that my APR for a cash advance is 29.99% -- meanwhile, my purchase APR on that same card is 21.24%.

Unlike with a credit card purchase, you don't get a grace period with a cash advance. That higher APR starts accruing immediately, so even if you pay the money back within the month, you'll pay interest on it.

Finally, if you're hoping to cover a large expense with a cash advance, you might be out of luck. You might have a substantial credit limit on the card, but your cash advance limit will be quite a bit less, depending on the issuer and the card.

For that same credit card of mine, my cash advance limit is a paltry 5% of my total credit limit. Oh, and you won't even earn rewards on your cash advance like you would with regular credit card spending.

Better ways to get cash in a hurry

Need a fairly small amount of money fast (say, $500)? Rather than turning to cash advances, consider these options:

• A small-dollar loan from your bank: You might be able to borrow several hundred dollars from your regular bank in exchange for a flat fee and then pay it back over a few months.
• A payday alternative loan (PAL): Are you a credit union member? You might have access to one of these loans, which have capped fees and interest rates (unlike their similarly named predatory counterpart, payday loans -- avoid these).
• Borrow from your credit card issuer: Some credit card companies also offer small loans that have more favorable terms than cash advances.
• Ask friends or family: Perhaps you have people in your life who are in a position to extend you a small loan. Just put the terms in writing and pay them back -- they are doing you a huge favor.

Taking out cash advances isn't a good move. Doing so can cost you money and a potential debt headache.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .