You’re walking by an ATM in the mall and you need some cash. But instead of whipping out your trusty debit card, you search for a credit card. Your checking account is a little low, so you’ll just get a cash advance on a credit card. You swipe your card. Ka-ching! Easy money!
You’ll pay it back when the next statement arrives. Or maybe the one after that. What’s the harm, right?
Well, there’s plenty of potential harm. Getting a cash advance on a credit card can lead you into a world of hurt. If you read my credit card reviews, you know that when I get to the part about cash advances I always say something like, “Don’t get a cash advance on a credit card unless your life depends on it!” I know that’s a little dramatic, but you know how I get when I’m riled up. I just see a situation where too many folks could get this “easy money” and fall right into credit card debt. Here’s why it could happen.
Reason #1: There’s no grace period
When you purchase an item, you usually get a grace period, which is around 21 to 25 days. If you pay the full balance before the grace period ends, you don’t pay any interest. But on a cash advance, the interest clock starts ticking as soon as it’s posted to your account. You can’t avoid paying interest on a cash advance. And if things don’t go as planned and you don’t pay the advance back quickly, the compound interest will kill you.
Reason #2: There’s a transaction fee
This little tidbit often catches people by surprise. There’s a fee for the convenience of a cash advance and it’s usually 3 percent to 5 percent. So if you get $500 from the ATM and there’s a 5 percent fee, you’re going to have to pay $25 (500 x .05) for the transaction fee. Now you owe $525, not just $500. I think $25 is a lot of money to waste. And we haven’t even talked about the interest rates yet.
Reason #3: The interest rates are in loan-shark territory
Many folks aren’t aware that the APR for a cash advance is rarely the same as it is for purchases. You can have a 12.99 percent APR for purchases, but have a 25 percent APR for cash advances. So not only are you paying interest from the get-go, you’re paying it at loan-shark rates.
Here’s an example: Let’s say the APR on your $500 cash advance is 25 percent and the transaction fee is 5 percent. If you borrow the $525 for one year, you could end up paying around $599, with interest, by the time this is over (per CreditCards.com calculator). And if you’re already carrying a balance, the amount of interest will be even higher.
Just Say No to Cash Advances
Listen, I’ve talked to so many people who had every intention of paying back their cash advances the very next month. I know I say this a lot, but life is awful messy. That’s why it’s important to have an emergency fund.
In the past year, I’ve had to replace my roof (read How Should I Pay for the Two Holes In My Ceiling? if you have a morbid curiosity about how messy life can really get!), get new carpet in my family room, fix my daughter’s car, and replace a microwave oven. Have I mentioned I have one kid in grad school and another one who just started college? I’m not whining about my expenses, just showing you why I’d be in deep you-know-what if I didn’t have an emergency fund.
Alternatives to Cash Advances
If you don’t have the cash, take a deep breath and wait until you have the money free and clear. But if you really, really need cash, explore other options first. Stay away from payday lenders, though.
See if you can get a personal loan from your bank, check into peer-to-peer lending, or perhaps ask for a loan from a family member. Note: If you do get a loan from a family member, make sure you put it in writing and be diligent about paying back the loan, including any interest you agree to. I’ve heard about terrible family squabbles over money. Actually, I’ll bet most of us have seen or heard of a family argument over borrowed money!
Another option is to let LendingTree help you find the best personal loan rates based on the amount you need and your credit status (excellent, good, fair, poor). You’ll go through a series of questions so they can find the best matches for you. And full disclosure: I’m the Consumer Credit Adviser for LendingTree. But I don’t make any money if you get a loan through the site. I’m recommending it because it’s a good way to find the best rates and they don’t work with payday lenders.