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Credit card to cash

credit card to cash

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What is a Credit Card Cash Advance?

A cash advance is the process of using one’s credit card to obtain money immediately. We do not recommend this - we think cash advances are a bad deal to consumers. It should be a last-ditch effort only if you need money and have exhausted other options (such as withdrawing money directly from a savings account). By taking out a cash advance, individuals are subjected to high fees and high interest rates. Cash advances also start collecting interest the second you get them, quickly subtracting away any short-term gains. We’ve constructed this guide to help you understand everything there is to know about cash advances, and what to expect if you decide to take one out. We will do so by exploring:

  • The mechanics of a cash advance – In most cases, performing a cash advance is fairly straightforward with upfront and hidden fees. Understanding these features can help consumers minimize the cost of a cash advance
  • Things to be Careful of with Cash Advances – Paying down a balance from a cash advance is not a straightforward process, and something that is not well explained by the terms and conditions of most credit cards
  • Credit Card Cash Advances in the United States – a look at what one can expect when taking out a cash advance with any one of the major credit issuers in the United States. In particular, US Bank and Bank of America operate differently than most other institutions, having more complex rules about cash advances that can end up saving a consumer money

How does a Credit Card Cash Advance Work?

Cash advances are generally performed at an ATM, with a bank teller, or through the use of a convenience check. To take out money at an ATM using your credit card, you need to have a PIN set up with your card issuer. If you didn’t set a PIN when opening your account, call your credit card company’s customer service phone number. You may then withdraw money from any ATM, like you would with a debit card.

Here are the customer services phone numbers to some of the major credit issuers in the United States. You can call these numbers to request a PIN to be assigned to your credit card.

Some credit cards allow you to perform a cash advance by speaking directly with your card’s bank teller. Certain card issuers, such as US Bank, will charge you less money for the transaction, when using this method. We explain more about this in the third section of this article.

Finally, the third most common way of receiving a cash advance is by using a convenience check. You may be familiar with these checks, as credit card companies frequently mail them to cardholders (often with special offers attached). These checks can be used in the same way as ordinary checks, which are linked to a checking account. When these convenience checks come with an attached offer – such as 0% APR for a certain period of time – they can be worth considering. Otherwise, we advise consumers to stay away from them.

How much money can I take out through a cash advance? The answer to this will depend on your bank and your FICO credit score. The higher a consumer’s FICO score, the more of your credit limit he or she can use for a cash advance. You will never be able to take out a cash advance for an amount greater than your credit limit less the cash advance fee. Most banks will go a step forward and set a separate cash credit limit, which is just a small percentage of your total credit limit.

What is the cost of a cash advance? If you decide to take out a cash advance, you will have to pay an upfront fee and a separate APR. The upfront fee is on average $9 or 4% - whichever is greater. With the average credit card, the cost for cash advances up to $225 will be $9. For any larger withdrawal, you will pay 4%. The sum of the cash advance plus the fee will be the total cash advance balance on your account. This is an important distinction since it impacts the second cost, your cash advance APR. Your cash advance balance is separate from the balance that results from your purchases. The cash advance balance accumulates higher interest and begins gathering interest the moment you get the cash. There is no grace period.

In examining the credit cards in our database, we found the average APR on a cash advance to be around 24% - significantly higher than the purchase APR which averages between 13.02% and 15.77%. To get an idea of how much a 24% APR will cost you, we calculated the interest on a $1,500 cash advance that was taken out on the 1st day of the billing cycle. The upfront fee of the cash advance would be $1,500 x 4% = $60. For the first month, the interest would be 1.98%, or $31. Extending that over 6 months gets us:

By the end of the 6-month period, this type of cash advance would set you back 17%. You received $1,500, which ended up costing you $60 in fees upfront and $194 in interest after six months for a total of $254 in costs. These expenses are why we recommend most people stay away from cash advances, if possible. They're quite costly if one is unable to quickly pay the balance off.

Things to be Careful of with Cash Advances

How funds are applied: When you make a minimum payment on your credit card balance, the funds are applied to your purchases first before the cash advance balance. This is because most banks automatically direct minimum payments towards items collecting lower interest. Unfortunately, most banks will not allow you to target items on your balance when you make your payments. You will be unable to request that funds pay down your more expensive cash advances before your purchase balance. However, all payments in excess of the minimum are mandated by law to be applied towards the highest APR balance. Therefore, we advise that at any point that you take out a cash advance, your next payment should be the minimum + the cash advance amount. Better yet, pay the whole balance off completely, if possible.

Special types of purchases: Another thing to be aware of is that banks may consider certain purchases as cash advances even if you don't withdraw money at an ATM or use the convenience check. Anytime you make one of the purchases below, bear in mind that they could be treated as cash advances:

  • Lottery tickets
  • Casino gambling chips
  • Traveler’s checks/money orders
  • Foreign currency
  • Cash equivalent purchases on PayPal

Funding a PayPal account may, in certain cases, be flagged as a cash advance. This applies mostly to instances where you pay for a transaction using PayPal, and the merchant categorized the product they were selling as a ‘cash equivalent” (such as certain gift cards).

How Do Cash Back Credit Cards Work?

Most people expect using credit cards to be a rewarding experience. A survey of consumer card preferences by Total System Services, Inc., found that a rewards program is the most valued feature on a credit card, ranking ahead of the interest rate charged on unpaid balances.

Cash back is the king of rewards. Among consumers whose go-to credit card in heaviest rotation is a rewards card, nearly 70% are earning cash back, according to Total System Services’ survey.

Cash back can indeed be a rewarding way to wring extra value out of a credit card. Redeeming cash rewards can often be easier than jumping through the blackout period hoops to redeem travel reward points. Cash rewards can also make it easy to stay on top of your credit card bills, as you can have your cash back rewards automatically applied to your credit card balance. If that helps you pay down your card bill, that may help improve your credit score, as well. (Learn more about how lower credit card balances can improve your credit utilization ratio, one important factor in computing your credit scores.)

Understanding the key features of how cash back works can help you zero in on the rewards plan that has the potential to deliver the most cash back to you.

Sweet Deal: Get Paid When You Spend

When you make a purchase with a cash-back rewards card, you earn a cash credit for a percentage of the purchase. Typically you might earn 1% to 2% on all your purchases. Some cash-back plans also offer a higher payback on a specific spending category. For instance, you might be able to earn 3% back on your gas purchases.

Many cards also offer a special spending category that rotates each quarter, where the cash back rate can be 5% or so. For example, you might get 5% back on grocery spending this quarter, and then next quarter your grocery payback reverts to the typical standard rate of 1% or 2%, and another category, such as restaurant spending, earns 5%.

You typically need very good credit scores to qualify for a cash back card that offers a strong rebate deal, and a low-interest rate (APR) on unpaid balances.

Sizing up a Cash-Back Rewards Offer

Knowing the ins and outs of how a specific cash back offer works can help you find the deal that makes the most sense for your spending and charging habits. Questions you’ll want to consider:

  • Will your potential rewards offset the card fee? Paying a $75 or $100 annual membership fee might not make sense if you will likely earn less than that in cash back for the year. If the card waives the fee in the first year, be sure to check what the fee might be in subsequent years. Keep in mind that pocketing the most value from a cash-back offer requires being extra careful with how you handle your card payments. One late-payment fee can run $35. If you have two late-payment charges in a year on a cash-back card that earns you 1% back on your purchases, you would need to charge $7,000 just to offset the $70 cost of the two late fees. Added injury is that late payments can also negatively impact your FICO Score.

If you anticipate you might not pay off your balance in full each month, you will also want to compare the interest rate charged on a cash-back card with other cards. Paying a higher interest rate can quickly outstrip the value of cash-back rewards.

  • What is the limit on the juicy payback offer? Often, a 5% payback rate comes with a spending limit. For instance, you might get 5% back for a quarter on the first $2,000 you spend in a featured category. That works out to a nice $100 cash back reward for the first $2,000. But then any additional spending in that category may revert to the “standard” rate the card pays on all other purchases, say 1%. So, if you were to spend $3,000, you would earn a total of $110: $100 from the first $2,000 of your spending earning a 5% cash back reward, and then $10 from the next $1,000 in spending that earns 1%.

If you are intrigued by the rotating spending categories that can earn juicy cash-back points, size up how much effort you might need to put in to be eligible for the fat payouts. It’s common to require card holders to sign up each quarter for the big payback offer.

  • Will You Be Tempted to Spend More on High-Rebate Categories? If you know there is a higher payback rate for a category, would that make you more inclined to spend more than you might otherwise? Spending $2,000 in a category that you typically might spend $1,500 in without the extra enticement, is likely not going to pay for itself with the cash back reward.
  • Will the Card Still be Worthwhile After the Initial Sign-up Enticements? Many cards offer a cash bonus of $100 to $200 when you start using a cash-back card. Make sure you understand how much spending you need to do-and in what time period-to earn the bonus. For example, you might need to spend $1,000 in three months to earn a $100 bonus. And think through what happens after that first-year bonus. If the card pays you a flat 1% cash-back reward, you might be better off in a card that pays you 2% or more the first year, and every subsequent year, even if the sign-up bonus isn’t as high.

It’s also common for cash-back cards to offer a low interest rate on unpaid balances-and balance transfers-for the first year or so. If you anticipate carrying a balance past the intro period, you’ll want to size up whether that “normal” rate is competitive with other credit cards.

How to Cash In on Your Cash Back Rewards

Each credit card issuer has its own rules on redeeming. It’s worth spending a few minutes focusing on the fine print to understand the rules for cashing in. Some cards guarantee your cash back rewards will never expire, others might require you to redeem your cash back within a year or two. You might also need to make at least one charge on the card each year—not exactly a very high or hard hurdle-to keep your rewards points. If you ever are pondering cancelling a credit card—a move that should be done only after careful consideration because it can negatively impact your credit scores – be sure to check what will happen to any unredeemed cash-back rewards.

Some cards offer multiple ways to redeem, others stick to one option. Common ways to cash-in:

  • Apply the Cash Back as a Credit on Your Card Statement. It’s no secret that running a credit card balance can be quite expensive. Recently, the average interest rate charged on unpaid credit card balances was around 14%, with a top rate that can be more than double that amount. Using a cash-back reward to pay down your credit card balance can be a valuable debt-reduction strategy.
  • Have a check mailed to you, or arrange for a direct deposit payment into a checking or savings account. Some banks offer bonuses if you deposit the money in one of their checking or savings accounts.
  • Get a gift card. You might be able to get your cash-back as a gift card for a popular retailer such as Amazon.com.

Earning money back when you spend money is clearly a rewarding experience. Knowing how cash-back rewards cards work puts you in the driver’s seat to find the offer that best fits your needs.

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How to Cash In on Cash-Back Credit Cards

Before you throw away any more of the credit card offers landing in your mailbox, take note: You might be overdue for a credit card makeover. Adding a new card or two to your wallet can reward you for your spending or win you valuable new benefits, such as cell-phone insurance. Yet 20 million consumers have never changed their preferred credit card, and an additional 25 million have held on to their favorite card for at least 10 years, according to a 2016 CreditCards.com survey.

Among the most popular rewards is cash back for purchases. About half of all credit cards that offer rewards now offer cash back, up from around 25 percent in 2013. “Some of the cash-back credit card programs being offered today are the most lucrative we’ve ever seen,” says Marc Bellanger, senior strategy director with Merkle, a marketing agency that works in the credit card and banking industry. (For non-cash-back cards with generous rewards, see “6 Cards With Other Benefits Worth Considering,” below.)

Unlike cards that compensate you with points or miles that can be redeemed only for merchandise or travel, cash-back credit cards refund a percentage (typically 1 to 2 percent, but up to 6 percent) of your charges, usually in the form of a statement credit, a check, or a deposit into your bank account.

The way they work is simple, but finding the card that’s right for you may not be. Some cards reward a flat rate back on all of your purchases; others give you a modest percent back on some categories of purchases and a higher percent back on others, such as gas or groceries. Sometimes the amount you’ll get back changes each quarter. And some cards offer big bonuses if you spend a certain amount within the first few months. In terms of costs, there are cash-back cards that charge an annual fee and others that require you to maintain another account at a particular financial institution, so you also have to consider those possible costs.

All of that research can be labor-intensive. To help make finding a more rewarding card less daunting, we used our proprietary credit card comparison calculator to review 83 rewards-card programs for six common spending scenarios based on data from the Bureau of Labor Statistics. And because we found that you can earn up to 40 percent more cash back by strategically using two cards instead of just one, we came up with card pairings that will increase your refund. (See “How to Stack the Cards in Your Favor,” below.)

We evaluated the programs over a three-year period because certain cards offer a generous sign-on bonus but more limited rewards in subsequent years. We also assumed that cardholders don’t carry balances (finance charges can swallow up any rewards). And in the case of cards that award points or miles but allow you to convert them to cash, we considered the actual dollar value of the rewards.

A few generous rewards cards came up more than once because they work well for more than one kind of spender.

We also provide a spending strategy for the two cards, because even the best pair is only as good as the way you use it. (To remind yourself which card to use for which purchases, keep a note in your wallet.)

For a more customized search for a cash-back card, try our easy-to-use Credit Card Adviser Comparison Tool, powered by a version of the software we used for this analysis.

The tool compares the benefits of cash-back cards and lists them in order of best to worst based on your actual spending data. It also estimates for each card the total cash back you’ll receive after one year and after three years. To use the tool, first review your credit card statements to determine your total yearly spending on gas, groceries, restaurants, and travel. (The rest of your spending goes into one category that the tool calls Everything Else.) Then divide the totals by 12, plug in the monthly figures, and voila!, it will show you which credit card will pay you the most cash back in the first year and after three years. (Unlike the spending profiles below, our Credit Card Adviser Comparison Tool will recommend only one card, not a pair.)

Follow our guidance, and within a few months you’ll see the cash start piling up.

Do you use a cash-back credit card?

Tell us about your experience in the comments below.