Is a Credit Card Cash Advance a Smart Choice in Emergencies?

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Most people don't realize it until it's too late: Using your credit card for cash advances has expensive consequences. Not only will you pay a cash advance fee to transact the withdrawal, but interest starts accumulating immediately. Depending on how much you withdraw, this could end up costing you more than you anticipated.

But cash advances do have one attraction: You can get cash instantly. Regardless of the consequences, cash advances could be appealing if you're facing an emergency expense and don't have money in your checking account.

That said, even if you've run out of cash (and options to borrow it), stop and think before you take out a cash advance. While they can put cash in your pocket immediately, they can cause a lot of financial stress. If you're considering one, here's what you should know.

Know what you're getting yourself into before you take out a cash advance

A cash advance is when you borrow money on your credit card. It's pretty easy to do (most ATMs will let you do it with a PIN). As long as you have available credit on your card, your credit card company won't make you jump through hoops to get your cash.

However, cash advances come with fees and increased interest rates that can make it difficult to pay it back. Transactions fees typically range from 3% to 5%, while the annual percentage rate (APR) could be several points higher than your card's regular rate.

To see this in action, imagine your credit card charges a 5% cash advance fee and has a 29.99% cash advance APR. You take out $5,000 from an ATM and anticipate paying it back within 12 months.

First, you'll pay a transaction fee of $250. Assuming you do pay off in 12 months, you'll pay about $695 in interest. In total, you'd pay $946 in interest and fees. That's almost 19% of the amount you borrowed.

If you are going to use a cash advance, have a payoff plan

I don't want to pretend that everyone has the privilege of avoiding cash advances. I realize that some people just aren't in the position, whether because of their credit score or something else, to pursue other less-expensive options, like personal loans . Sometimes, you have to make do with what you got, and if what you got is a credit card, well, you might just feel the need to take out some cash.

There are, however, some best practices that could help you pay off your cash advance economically.

First, read your credit card's terms and conditions. Calculate how much the transaction fee will be and pay close attention to the cash advance APR. These numbers will help you later determine how much the cash advance will cost.

Second, come up with a repayment plan. Decide how much you can repay each month. Use online calculators to determine how long it will take and how much interest you'll pay overall. Having all this information in your head before you start will give you a good perspective going forward.

Finally, don't hesitate to start paying this debt off. Since interest accumulates on cash advances from the get-go, the sooner you pay it off, the less interest you'll pay overall. If you come into a cash windfall -- say, you get a refund after your tax filing -- use it to pay this debt off first.

That said, before you get a cash advance, do explore other options, like asking your friends or family for a loan or opening a 0% APR credit card . If you can avoid a cash advance, you could help your future financial situation. But don't feel ashamed if you have to -- just keep a plan in mind and tackle the debt with as much urgency as the emergency expense that brought it about.

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