January 6, 2013 – 1:00 am
Using credit cards to get a cash advance isn’t something that people tend to think about until they are in a difficult situation and need money.
By: Melissa Hathaway
Resorting to a credit card cash advance can seem like the only option in a difficult situation, but it’s rarely the cheapest.
The festive season is here, and women in particular can be left feeling under pressure to conjure up some Christmas magic for the family even when finances are tight. According to recent news reports, US consumer debt is at an all time high, but since the credit crisis many Americans are being more cautious about the way they use their credit cards to spend money. Using credit cards to get a cash advance isn’t something that people tend to think about until they are in a difficult situation and need money to cover a mortgage payment, pay another credit card bill or simply to put food on the table. The option to quickly withdraw cash on your credit card at an ATM can seem very tempting, but how much do you lose by taking an advance?
Check the Interest Rates
The interest rate for a cash advance may not be the same as the one you are charged for regular purchases. Credit card companies are aware that people taking a cash advance are likely to be desperate, and are prepared to accept the higher rates in an emergency. These consumers are also considered to be a higher risk for lending. Bear in mind that interest on a cash advance starts accumulating from the moment you get the money. When you make a regular purchase on your credit card, the company usually gives you a reasonable period of grace (about a month) in which to pay off the debt in full before the interest starts building. This does not apply to a cash advance. The only way to minimise the cost of interest on a credit card advance is to pay the full amount as soon as you are able to.
One-Off Cash Advance Fee
In addition to the interest applied to a withdrawal, the credit card companies charge a fee to use the cash advance service. You can expect to pay 3-5% of the total amount, or a minimum fee of around 10$ for each advance. Keep this charge as low as possible by withdrawing the full amount that you need in one go. Repeat withdrawals will rack up big fees.
Protect Your Credit Score
Withdrawing cash on a credit card shouldn’t hurt your credit score in itself, but there are some precautions you can take to make sure it remains unaffected. Firstly, check your cash advance limit. Exceeding this amount could leave you with penalty fees and a higher rate of interest. Note that your cash advance limit may be significantly lower than your credit limit on standard purchases. Secondly, withdrawing cash on a credit card with the lowest interest rates and a 0$ balance will make it easier to pay back the debt quickly by minimising the cost of borrowing. If you are repeatedly unable to clear the full balance, your credit score may suffer.
Consider the Alternatives
Taking a cash advance is an expensive way to pay an existing credit card debt. Balance transfers offer a cut in interest rates by moving the debt to a new card, allowing the consumer to make progress in reducing their outstanding balance at 0% interest for the length of the deal. Most companies will charge a small balance transfer fee of around 3% for this service.
If you normally have good credit and a regular income, taking a personal loan from your bank may be appropriate. This type of borrowing tends to have a lower interest rate than a cash advance.
Payday loan companies have a bad reputation for huge interest rates and poor terms, but some employers are happy to offer a payday advance for emergencies. This route avoids interest rates and fees but remember that the next paycheck will be lower, so you effectively have to clear the debt quickly or risk continuing to be short of money in the future.
Shop around for a low rate purchase card. Like the balance transfer option, this type of credit card comes with a much lower interest rate than a cash advance, and offers an interest-free period to help you pay the balance. The credit card cash advance is an option to resort to in an emergency, but taking a smart attitude towards borrowing can save thousands.