Credit cards can be used for several different ways. Most often, they are used to purchase goods and services. But many people use them for cash advances. This can be done in cases of emergencies, such as a cash shortfall, but it’s also a dangerous habit to get into, particularly if you’re trying to keep your credit card debt under control or pay it off. What are the dangers with using your credit card to get money?
It’s Too Accessible
Cash advances are just too easy to use! It’s far too convenient to justify the use of cash advances if you need to buy things but you don’t have a lot of money in the bank. The rationale goes something like this:
“I want/need to buy such and such, I have no cash on me. I shouldn’t use the bank account. I don’t want to use my credit card in the store…I’ll get a cash advance.” That way, it’s easy to fool yourself into thinking you’re not using your credit card.
If you don’t believe me, the next time you take out an advance for something, stop and think about why you’re doing it and what your thought process was.
Worse still, if you have online banking, you can just shuffle money from your credit card account to your checking account, even if your card is “locked.” It’s simply too easy to get into the habit of using your card without ever actually carrying it, thanks to cash advances.
The fact that this sort of money is too accessible isn’t necessarily a danger in and of itself, but it leads to the dangers–and the biggest one is the cost. For many cards, cash advances carry an interest rate of up to 10% more than purchases. It’s very common to have a card with say a 15% APR on purchases, but a 21% or 25% on cash advances. It’s one of the main ways creditors make their money. So, if you’re paying 25% on your cash advance, that means that for every $100 you take out, you have to pay back $125. That’s a scary number. If you purchase something for $100 on a credit card with a 15% APR, you have to pay back $115.00. That’s a ten dollar difference that adds up quickly.
Furthermore, you may have to pay card-convenience fees for using an ATM that isn’t affiliated with your credit card issuer, additional fees for using the card for a cash advance, and so on. The amount of money stacks up and can sink you into a debt hole.
Finally, you don’t get a grace period with cash advances that you do get with purchases. This means that you rack up interest from day one. This matters. In addition, usually the credit card companies structure the terms of payment so that the cash advance is paid off after regular purchases are paid for. This also matters because not only do you pay the higher rate if you can only pay off your other purchases–but if you have a low APR balance transfer card, you will now be paying a huge amount of interest. Not cool.
When Can You Use Cash Advances?
Cash advances can be beneficial, but you have to be incredibly careful with it. Only get one if you absolutely need it, not if you just want something. Pay off the cash balance as soon as possible so that you don’t build up too much interest on it. Only take out the advance in your bank so you’re not getting dinged with a convenience fee. And use a card with the lowest possible interest rate on cash advances to save money.
The bottom line is, cash advances should be avoided as much as possible: they are too expensive and rather addictive. Be sure to budget your finances wisely in order to avoid cash advances whenever you can!