Why You Shouldn’t Use A Cash Advance
Credit card companies are really good at marketing and enticing people to use their various product offers, including convenience checks and cash advances. However, as many of you already know, using a cash advance is often times a losing bet for the consumer.
While it is possible to use your credit card to obtain cash, this practice can dig you deeper into debt and often will result in making a bad situation worse. Unfortunately, I have to admit that I have fallen victim to the cash advance perils while in college as I had taken money to cover expenses. Thankfully, I have learned that lesson and will never repeat that mistake. Here are the main reasons why you should not use a cash advance:
The interest rate on a cash advance is almost always higher than the rate for purchases. It is not uncommon to see a cash advance rate in the neighborhood of 20% interest. You have to ask yourself why you would need cash that bad to pay 20% interest. Often times, you can find an answer to the need for money without resorting to a cash advance and it will cost you far less in the long run.
No Grace Period.
Typically, when you use a credit card for a cash advance there will not be any grace period. This means that you will begin accruing interest the moment that the cash hits your hands. Unlike purchases that typically have a grace period where you will not be charged any interest if you pay the balance in full, the cash advance hits you immediately. In addition, as mentioned above, the interest is often accruing at a substantial interest rate.
If the above two reasons are not scary enough, cash advance offers usually will include a one-time fee as well. The fee will vary from credit card to credit card, but is usually either a flat fee or a percentage of the transaction amount. While there used to be a maximum limit on the fee, many credit cards have since removed that maximum limit and charge a percentage of the total transaction. Obviously, this fee can be quite costly depending on the amount being requested.
Rather than use a cash advance, I think there are usually a few alternatives that can be pursued that will not be quite as costly. While convenience checks often come with the same transaction fee as the cash advance, the interest rate is usually much more reasonable and may even be classified as a purchase, meaning there could be a grace period.
Obviously the best alternative is to build up an emergency savings account that can be accessed when needed. Depending on where you open your savings account, there may be a delay of a few days before you receive the funds. If you are uncomfortable with that delay, it may be beneficial to keep a small amount at a local bank or credit union for immediate access.
There is no doubt that people make foolish mistakes, which I have done myself as mentioned above. But one financial mistake that should be avoided at all costs is the use of a cash advance.