Why You Should Never Get a Cash Advance from Your Credit Card
When you signed up for your last credit card, you may have noticed some verbiage in the terms about cash advances. If your credit card company is anything like mine, they may even send you cash advance checks on occasion, which you could simply deposit into your bank account for instant access to funds. But is a cash advance ever a good idea?
My opinion is that they should be avoided like the plague, and only used as a last resort. Here’s why:
The Interest is Sky-High
In that aforementioned credit card paperwork, you probably saw how your purchase and balance transfer APRs were in a particular range, depending on creditworthiness. But did you notice that the cash advance APRs listed were even higher? Well, they usually are.
That’s right: you’ll pay even more in interest for a cash advance than you’ll pay on purchases. In fact, CreditCards.com looked into the terms for 100 different credit cards, finding that while purchase APRs were an average of 15.79 percent, the APR on cash advances was 23.68 percent. If you don’t pay this off right away, it can easily turn into quite the pricey loan. Beyond this, though, is the fact that interest begins accruing immediately on cash advances, which is different than the process for purchases. With purchases, you have a grace period to pay off the bill before interest is charged – that’s how people can avoid paying interest altogether, simply by paying their balance in full each month. However, this isn’t the case with cash advances.
When you take out a cash advance – either at an ATM or by using one of those convenience checks that your credit card company so thoughtfully sends out – you’ll begin accruing interest immediately. There is no grace period, no amount of time where you can repay the loan without penalty. No, you’ll start building interest charges from minute one.
Oh, and even though the credit card company is making interest off of you and your loan, you won’t be earning any rewards on that debt. Sorry.
The Fees Are High, Too
To add insult to injury, cash advances from credit cards are usually accompanied by fees. These are often higher (sometimes even by double) than balance transfer fees.
For most credit cards, the cash advance fee is either 5 percent or $10, whichever is higher. While $10 might not sound like much if you’re in a pinch, keep in mind that it can add up quick. I’ve frequently gotten those convenience checks for anywhere from $800-$1,500. Were I to cash one in, I would be looking at fees of $40 to $75, not even counting the interest that would be added.
Oh, and there’s even more salt in the wound if you choose to pull cash from an ATM: both the credit card company and the bank owning the ATM that you choose to use will likely charge fees.
It Can Hurt Your Credit
Sure, the credit card companies offer you cash advances. It’s a service they provide, and they may even push the feature onto you. But if you actually use it, it could impact their view of you and your financial situation. Lenders don’t want to see you using cash advances, as they know it means you’re likely in a bind.
Plus, there’s also the issue of how it can affect your credit score. If you are using your credit card responsibly, you likely have quite a bit of available credit (you’re paying the balance in full each month, right?). However, if you use up that available credit with a cash advance loan, you’re going to ping your credit utilization ratio.
Considering that this ration makes up at least a tenth of your FICO score, it’s not something you want to see rise.
If you need cash quickly, there are plenty of options aside from a cash advance loan from your credit card company. Sure, it can be kept on the back burner as a last resort, but be sure to exhaust all other options before turning to this (pricey) route.
As inconvenient as it is, and maybe even a little embarrassing, you would be better off from a financial standpoint if you asked friends or a family member for a small, short-term loan, rather than turning to a cash advance. You could also look into a personal loan through your bank, or a crowdsourced loan through a P2P company like Lending Tree.
You could pull contributions from a Roth IRA penalty-free, if it came down to it, just be sure to replace them as soon as you can – saving for retirement is of utmost importance. Lastly, it would potentially even be better (and cheaper) to overdraw your checking account and pay any applicable overdraft fees for a charge, rather than take the cash advance. Whether your credit card company nudges you toward a cash advance loan or simply offers is as an option, steer clear if you can. These loans, while convenient, can end up costing you and arm and a leg in fees, interest, and impacts to your credit score. Exhaust all other available options first – your bank account will be glad you did.