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What is a credit card cash advance?
A credit card cash advance -- whether from an ATM machine or through “convenience checks”-- is just about the most expensive money you can buy, short of a pay-day loan. Here’s why:
- The amount advanced will cost you an upfront fee of 2% to 4%. If you borrow $4000, then a 4% fee will come to $160.
- Check the fine print. The interest rates on the cash advances are much higher than the card purchases. A rate of 21% for this money is not unusual.
- Unlike most credit cards, cash advances have no grace period. Those high interest charges will start to mount the moment you take the money from the ATM. Keep in mind that the interest rate will be tacked on to the fee as well – ouch!
- Don’t be surprised to find the creditor applying your payments to balances for purchases first. You get to apply funds to cash advance balances only after the lower interest rate purchases are paid down.
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You need to know, though, that card issuers can set their fees according to the marketplace, internal objectives and state regulations. Other factors that will affect these fees include your credit history and, possibly, the type of card you have. It is not unusual to find one institution charging a wide range of fees and rates for various cards.
Creditors say they charge these fees because it is more expensive to process cash transactions than regular card purchases. They also claim that frequent cash advance users have a higher default rate than other users of plastic. The increased cost and risk is passed along to the customer.
Most people don’t seem to notice. According to Visa, the largest credit card brand, cash advance activity increased by 8.1% between March 2002 and 2003. Keep in mind too, that the fees are not hidden. By law, creditors must make full disclosure about fees and charges for their services. You can find this information on the back of your monthly statements.
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When considering a cash advance, carefully read your statement, before finding out that you are in way too deep. If there is anything you don’t understand, ask.
If you’re not satisfied, then keep shopping until you find something better.
Of course, before you take the plunge, we urge you to review your budget very carefully and ask yourself if you really need that advance. It’s obvious that this quick and easy way to get money can lead to very serious financial problems. Unfortunately, those who take advantage of card advances often do so because they have no choice. Typically, that money is used to pay other credit card debt, as well as for such necessities as groceries and utilities. Indeed, advances were created for those with no other option. Of course, if you are at that point, your debt has most likely gotten out of control, and you should take immediate steps to address it. |
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