Most credit cards give you the ability to withdraw cash from an ATM. Your card issuer might even encourage you to get cash on your credit card by sending convenience checks. Just because your credit card makes it easy to borrow cash doesn’t mean you should. In fact, you shouldn’t. Cash advances are among the worst types of transactions you can make. They’re expensive and can lead to credit card debt.
Why Credit Card Cash Advances Are So Expensive
When you take out a cash advance, you get charged a fee – a cash advance fee – that’s typically a percentage of the amount of the cash advance. These fees typically range from 2% to 4%. That means if you have a cash advance of $500, you’ll pay between $10 and $20 for taking out the cash advance.
The cash advance fee isn’t the only fee you face with a cash advance. You’ll also be charged an ATM fee depending on which bank’s ATM you use. The ATM fee is another $2-$4 you pay for a cash advance.
Assuming you paid each balance within the same amount of time, you would pay more interest on a $500 cash advance than on a $500 plane ticket. That’s because cash advances almost always have a higher interest rate than the interest rate that’s applied to purchases. The longer it takes you to pay off a cash advance, the more interest you’ll pay.
From now until February 22, 2010, credit card companies have the option of paying off your cash advances last when you have multiple types of balances with different interest rates. For example, if you have a $100 purchase balance at 10% and a cash advance at 15%, any payment over the minimum will go toward the purchase balance. Meanwhile, the cash advance accrues interest at the higher interest rate. After February 22, 2010, card issuers are required to apply any payment over the minimum to balances with higher interest rates.
Most credit cards don't have a grace period for cash advances. The grace period is the amount of time you have to pay your balance in full before you begin to pay interest. Since cash advances don’t have a grace period, finance charges begin accruing the instant you take out the cash advance.
You Could Have a Bigger Cash Flow Problem
The fact that you need to take out a cash advance could indicate a bigger problem. Ideally, you should receive enough income to meet all your financial obligations. Consider this: if you don’t have enough money to pay your bills and other expenses, how will you have enough money to pay your credit card bill when it comes?
People who take out cash advances are more likely to default on their credit card than people who do not. That’s part of the reason the interest rates are higher. It also means you’re at risk of falling behind on your credit card payments if you have to take out a cash advance.
If you find that you’re frequently using cash advances to pay for things, especially things like groceries and utility bills, it’s time to take a closer look at your budget. You may even need to receive financial counseling to figure out why you need cash advances to make ends meet.
