Let’s face it… there’s a lot of dumb things you can do with a credit card and a cash advance definitely ranks near the top of the list.
Sure, they may not be as bad as paying the equivalent of up to a 391% APR (or higher!) on a payday loan, but cash advances are still a rotten deal…
Reason #1. The interest rate is always higher
Credit card cash advance interest rates will almost always be higher than what you would pay on purchases or balance transfers.
You will occasionally find an exception to this. For example the Citi Simplicity card features the same APR for everything, whether it’s a purchase or advance. But double check that card’s application because obviously there’s no guarantee they won’t change that in the future.
Reason #2. Interest begins now
First of all just to clarify… as is the case with any credit card transaction, interest begins immediately. However with purchases you have a grace period so if you pay your bill in full, you don’t ever see it (but if you don’t, on the following bill the interest charges will appear going back to the date of the purchases).
However with cash advances on credit cards, there is never a grace period. That means it doesn’t matter whether you pay the money back in full when the bill comes… you still will be charged interest the moment the cash is advanced to you.
Reason #3. Your account might be flagged as high risk
If everything was peaches and cream, obviously you wouldn’t be taking an advance. When someone uses one of these, it’s usually for a somewhat dire situation, such as cash to pay a mortgage. Or worse yet (much worse!) is that some people use these funds for speculative or foolish purposes, like gambling.
Whatever the case may be, the instant you start doing cash advances on your card, don’t be surprised if the bank starts monitoring your account more closely. If the activity makes you appear you might be at wits’ end, they might decrease your credit limit or take some other adverse action.
I rarely hear of Citi, Bank of America, Wells Fargo, or Chase doing this, but I know with American Express they will occasionally flag a customer’s account to verify your income/employment. When that occurs they ask you to fill out a 4506-T form covering the past 2 years. With that, you give AmEx permission to pull your tax info directly from the IRS.
But I still want to proceed anyway!
If you know the disadvantages and still want to proceed, you have every right to do so. I just want you to make an informed decision.
So if you insist on proceeding, here’s are some tips which will come in handy:
1. Compare the rates and fees across all your cards
If you have multiple credit cards, then compare the cash advance fees and rates on all of them. There’s a good chance all of them will charge you an APR north of 20%. Some [most] also charge an additional fee:
Sometimes this fee is the most expensive part. Why? Because if you pay back the money within a few weeks your interest charges might not be a lot (percentage wise). However the upfront 5% cash advance fee is a lot to pay for only a short-term loan.
There are some no cash advance fee credit card offers on the market, too.
2. Pay attention to your debt to credit ratio
Remember that part about your account being flagged as high-risk? Well, that’s more likely to happen if you are getting close to maxing out your credit limit.
Ideally, it’s best to keep your debt to credit ratio below 25-30% on any given account. But of course if you’re using a credit card cash advance, that might not always be possible (because I’m guessing there’s a good chance you already have a balance).
So even if it’s not possible to keep your debt to credit that low on the account, you certainly don’t want it to be something high like 70 or 80%… so please keep that in mind.
3. Sometimes a balance transfer is cheaper
There are a couple different scenarios where you may actually be able to use a balance transfer in lieu of a cash advance:
- Promotional Checks: Most credit card companies seem to send these out on a monthly basis. Some banks allow you to write the check to whoever you want (even yourself) and it will still count as a balance transfer. That may be cheaper since there could be a 0% period and/or lower APR than a cash advance would carry. Just make sure to read the fine print because sometimes they trick you and still count those checks as a cash advance!
- 0% Balance Transfers: If possible, this ideally is the way to go. When you open up a new credit card for a balance transfer, some issuers will give you the “balance transfer” in the form of a direct deposit to your checking account. You can then use the funds as you see fit, as long as you follow the credit card company’s rules in doing so.