Looking for a credit card feature that helps save money? You’ve found it! Credit cards also offer cash advances (CAs) as part of their service, which would appeal to anyone needing quick access to cash. Cash advances are considered one of the least expensive methods of obtaining cash with a debit or credit card. While it may seem like an attractive solution when you’re in difficulty, there are many ways a CA will eventually cost you even more than what you borrowed.
Imagine this scenario: You’re at a bar or restaurant and want to pay with your credit card. But all you have on you is a Credit Card and no debit card or other ATM linked account. At this moment, a CA can feel like a very good option. You approach an ATM or go to a bank with your CC and within seconds you have access to the cash you need. Easy right? Well, maybe not.
You see, a CA is a way for you to borrow funds from your credit limit on your credit card account, rather than withdrawing funds directly from your checking or savings account and essentially “charging” your CC with the money you need. It’s simple, but unfortunately there is a cost associated with the convenience of being able to do it quickly.
Typically, most credit cards will charge you a fee when you utilize their CA service. Generally, this will be around 5% of the total amount that you are withdrawing. So, for example if you withdraw $100 from an ATM, it does NOT cost you only that amount. You will actually pay closer to $105 in total when you account for the CA fee and before any interest rate is charged. Yes, you WILL see the CA fee deducted from your credit card account immediately upon obtaining the funds.
Cash Advances are not subject to the grace period of a typical credit card transaction. When you obtain your cash advance, the interest will begin to accumulate at that moment. Additionally, the interest rates for cash advances are typically higher than regular purchase APR (Annual Percentage Rate). Therefore, from day one, you pay much more, and you pay much faster.
By now, the negative perception associated with cash advances should be apparent. Cash Advances are simple; they are convenient; and they are costly. This combination can create a dangerous situation for someone experiencing cash flow difficulties. An item that may seem like a quick solution can quickly become a lengthy headache if you leave a balance collecting interest.
In general, yes—you should avoid them altogether. If you must use a cash advance, repay the balance as quickly as possible. The sooner you eliminate the balance on your cash advance, the less the interest will affect your finances.
A cash advance is not free money; it’s not just another charge on your credit card. Cash advances are one of the most costly options available to most consumers. Understanding how to utilize a cash advance before reserving funds from your credit card can help you avoid regret down the line.
Knowing when to stay away from a cash advance may be more cost-effective than using one.
