Credit cards are an excellent way to earn rewards, supplement emergencies and improve your credit score. However, they should not be considered an addition to your income, and you should know that cash advances can be dangerous. When you use a credit card at the ATM to obtain a cash advance, your bank changes the rules on how your credit balance is calculated.
The problem is that credit card cash advances are incredibly easy. Your bank might set you up with a PIN number to use at an ATM like a debit card, and they might also send you a booklet of courtesy checks to use for purchases. The problem is that cash advances are not the same as swiping your card, which can get you into trouble.
Cash Advance Fees
Most credit card issuers charge a flat fee for a cash advance, which is usually around three percent of the total cash you withdraw. For example, if you write a courtesy check for $900.00 on your credit card account, your bank will likely charge you an additional $27.00 for the convenience. This doesn’t sound like a terrible price to pay for obtaining cash when you need it, but those charges can add up fast.
Cash Advance APRs
In addition to the fee you’ll be charged for taking out a credit card cash advance, the APR on that cash will likely be higher than your standard interest rate. For example, one of the credit cards in my wallet carries a 9.9% fixed APR with a 25-day grace period on all purchases, which is rather attractive.
If I were to use it for cash, however, I would be charged an interest rate of 29.9% with no grace period to cushion the blow. This is a significant difference, and is likely to change the way in which I use my card. If you don’t read the fine print, however, you might not know about this discrepancy.
Many credit card companies have established a payment hierarchy for their customers, which isn’t usually beneficial to the consumer. What this means is that payments you make on your credit card are automatically applied to the purchases with the lowest interest rate. If you spend $500.00 by swiping your card and another $500.00 as a cash advance, you’ll be paying off the initial charges first.
Under this policy, even if you send a $500 payment to your credit card company, the $500.00 cash advance with the 29.9% APR will still remain as a balance. You’ll pay the higher interest rate even if you obtained the cash advance before making the other purchases.
If you need to get your hands on cash and the credit card is your only available option, there are ways to minimize the risks of putting yourself in financial jeopardy. First, if you’re going to get a cash advance, make plans to pay off the entire balance of your card as soon as it is due.
You could also apply for a personal loan from your bank and avoid the card entirely. Favorable interest rates are given to consumers with high credit scores, and you won’t be penalized when you use that cash for whatever emergency has transpired.