Why Cash Advances on your Credit Card are a No No
One of the most under reported and misunderstood part of having a credit card is the cash advance option that many cards have. With a cash advance, you can take out essentially your entire credit limit in cash, save for the fees attached to the transaction. While this may seem like a fantastic way to get some cash quick on a night out or a way to get extra money in an emergency, you should always think twice, or even three times before pulling the trigger on a cash advance. Here is why.
First of all, using the cash advance on your credit card can be habit forming. The first time you do it, you just get $20 or something similar because you were in a tight spot and you left your ATM card at home. The next time, you take out $100, and the next time $300 and so on. Not only can you use up your entire credit balance and max out your card faster than you ever thought possible, when you realize the fees and the interest rate you are now responsible to pay, you’ll wonder why you ever thought this was a good idea in the first place.
As everyone who gets a credit card soon finds out, credit companies love fees. One of the highest fees out there is the cash advance fee. Different credit card companies give different fees, but the general rule is that the cash advance fee is either 2 or 3 percent of your total withdrawal, or a set cash amount, whichever of the two is greater. It use to be the maximum fee was capped at around 10-20 dollars, but times have changed. Many card companies have done away with the cap and simply charge 2 percent of whatever you withdrawal, which can get pricy if you take out large amounts at a time. But as bad as the fees are, the biggest reason why you shouldn’t use the cash advance option on your card is because of the amazingly high interest rates.
How high are they? In most cases, as high as they legally can make them. Even if your card flaunts a low rate on purchases, and an even lower rate on balance transfers, chances are, the rate for cash advances is somewhere around 24 percent. Yes, that’s right, 24 percent. If you use your card to get $1,000 cash advance and then you are only able to make the minimum payments back, you will be paying significantly more than $1,000. No bank loan in the world will give you such a lousy rate to borrow money, why should you accept that rate from your credit card.
The key here is to read the fine print. There are a handful of cards out there now that do offer the same low rate for purchases, balance transfers and cash advances, but they are rare, and they usually make a pretty big deal out of it if they do. The full disclosure that is listed on the back of your credit card application should tell you what rate they offer for cash advances. If not, call the company and ask. Chances are, you’ll want to avoid the cash advance trap.