Cash Advances: Know Before You BorrowOctober 10, 2010 - 8:50 am
Cash advances are one of the features of credit cards that sound attractive until you get the first credit card statement after your cash advance. It’s then that you realize a cash advance isn’t like a regular credit card purchase. The cash you get from a cash advance might be the most expensive loan you ever borrow.
Higher Interest Rates
If you pay attention to your credit card billing statement, you might notice that there are several different APRs – one for purchases, one for balance transfers, and one for cash advances. You might also notice that the APR for cash advances is the highest APR of them all. This means that you’ll pay more interest on a cash advance than any other balance you carry on your credit card.
No Grace Period
If we were talking about purchases, a high APR wouldn’t be as big of a deal since you can always pay off your balance before the grace period expires and avoid paying interest completely. However, that’s not the case with cash advances which don’t get a grace period.
Interest starts accruing on your cash advance the day you withdraw it from the ATM. If you wait until your billing statement arrives to pay off the cash advance, you’ll have accumulated 25-30 days worth of finance charges by that time. To avoid paying so much interest, pay off the cash advance before your card statement comes in the mail.
Cash advances usually come with a cash advance fee that’s automatically added to your credit card statement. The fee is usually 2% to 4% of the cash advance. That’s $2 to $4 for every $100 you borrow.
Not only will you pay a cash advance fee, you’ll also pay an ATM fee if you use another bank’s machine to withdraw the cash.
Minimum Payments Won’t Matter
If you’ve made purchases on your credit card and then take out a cash advance, minimum credit card payments won’t reduce your cash advance balance at all. That’s because credit card issuers apply minimum payments to the balance with the lowest interest rate. Your purchases balance, which usually has the lowest interest rate, will decrease a little each month. Meanwhile, your cash advance balance will actually grow since interest is being added.
If you want to pay down your cash advance balance in addition to another, lower interest rate balance, you’ll have to send more than the minimum payment. Credit card issuers are required to apply above-minimum payments to the balance with the highest interest rate.
Cash Advance Rules
The cash advance rules not only apply when you withdraw cash from an ATM, but also when you use those convenience checks your credit card issuer sends. You’ll also be subject to cash advance terms and conditions if you use your credit card as overdraft protection.
Cash advances are expensive, but they have a place – when you don’t have access to cash and can’t use credit. Cash advances aren’t a good short-term loan, unless you have no other balance on your credit card and can guaranteed pay the money back within 7 to 14 days.