Cash Advance Cards: What You Should Know
Everyone has been there. An emergency comes up - maybe you have an unexpected medical bill or your car breaks down - and you need some cash right away.
One option often considered by cash-strapped individuals is a cash advance. Most credit cards offer a cash advance option for cardholders, and this option might seem like a good solution for those who need cold, hard cash.
However, there are significant risks involved with cash advance cards of which consumer should be aware. Before using their credit cards for a cash advance, consumers should consider these risks carefully, or they could find themselves in an even worse financial situation.
Potential Risks Associated with Credit Card Cash Advances
There are two primary potential pitfalls associated with cash advance credit cards:
The majority of credit cards will charge cardholders a fee in order to access a cash advance. These cash advance fees can range from 1 percent to 4 percent, and many credit cards will charge a flat fee regardless of the amount of the cash advance.
Credit card companies also employ a fee system that is based on a combination of a percentage-based fee and a flat fee. For example, a credit card might charge 4 percent or $20, depending on which amount is greater, for a cash advance.
In this case, if you used your credit card to obtain a cash advance for $200, you might think that you will only need to pay an $8 fee, or 4 percent. However, because the percentage-based fee is lower than the minimum fee of $20, you will end up paying a $20 fee for accessing $200 in cash, which amounts to a 10 percent access charge.
The interest rates for the majority of credit card cash advances are significantly higher than the credit cards' normal interest rates. Interest rates for cash advances often range from 20 percent to 25 percent versus an average of 15.88 percent to 17.3 percent for interest rates for purchases.
In addition to charging higher interest rates, most credit cards will apply payments to any balances with lower interest rates before applying payments toward the cash advance balance, which means that if you obtained a cash advance for $200 at the higher interest rate but have a balance of $1,000 at the lower interest rate, you will accrue interest on the $200 at the higher rate until the $1,000 balance is paid off. Additionally, if you use your credit card to make purchases at the lower interest rate before paying off the cash advance balance, any payments will go toward your new balance first.
Furthermore, most cash advances have no grace period, which means that you begin accruing interest immediately. Many responsible credit card users will pay their balances in full every billing cycle in order to avoid paying interest on their purchases. However, with cash advances, you will have already accrued interest by the time the billing period ends.
Who Could Benefit from Cash Advance Cards
So, should all credit card cash advances be avoided? The answer is not necessarily. The caveat is those who use cash advances should use this financial tool carefully.
Because of their fees and high interest rates, cash advances should not be used as a debt-relief solution. Those who make this mistake often find themselves even deeper in debt.
However, if you have a credit card that does not already carry a balance and you plan to pay off the cash advance quickly in order to avoid paying the higher interest rate over the long-term, then this option might work for you.