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A credit card-based cash advance is a method allowing the card holder to convert a portion of their available credit limit to cash. The method of obtaining the cash can range from using the credit card in an authorized ATM, writing special cash advance checks against the card's open to buy credit limit, or presenting the card in person at an authorized bank or lending institution. A cash advance is, in effect, a loan.

Unless the card issuer is making a special cash advance offer, receiving a cash advance, even if it is paid back quickly, is one of the most expensive methods of borrowing money. That's because of several reasons which include:

Cash Advance Fee

This is a fee that the card issuer levies whenever a cash advance is accepted. Although some special offers may establish a flat-rate fee, it is usually a percentage of the amount borrowed. Depending upon the state where the card is issued, that percentage rate can be quite high. The average fee runs between 3% and 9%.

No Grace Period

Except for some secured charge cards, issued to buyers with poor credit, charge card companies allow a grace period of 20-30 days, on average, for the cardholder to pay new charges off in full without incurring interest. This feature is usually not available when a cash advance is taken, so interest starts accruing at the moment the cash is received and continues to compound until the loan is paid in full.

Higher Interest Rates

Card issuers almost always charge a higher interest rate for a cash advance then they do for normal purchases. This may not be apparent unless the terms and conditions of the cash advance are examined carefully. Some charge card issuers may charge the maximum interest rate allowed by the laws of the state where they issued the credit card from. In the case of South Dakota, home to Citibank credit cards and several others, that interest rate can be as high as 20%.

Payments Applied To Purchases First

The credit card issuer will apply the monthly payment to normal charge card purchases first. If there is anything left after that payment is applied then it will be posted against the cash advance. This means that if a cardholder only makes the minimum monthly payment, it could end up taking years to pay back the cash advance.