Hazards of the Credit Card Advance

It’s two days before pay day and you are broke. Your brother is out of town so you can’t ask him for $50, and you are worried that the very attractive co-worker you’ve been flirting with will ask you to lunch and you’ll have to come up with a lame excuse. So, the dreaded credit card advance is tempting you. Get a grip. This is one of the last things you want to do. Let us count the ways in which this is a bad idea. First, there is usually a fee for a cash advance. Did we say usually? Always! Typically this fee is 5% of the amount that you want. So, if you want that $50, it will only cost you a measly $2.50. Let’s go do it. Wait, it isn’t $2.50. There’s a minimum fee of $10. So, the only way to get around an exorbitant fee is to withdraw the amount of which $10 is 5%. Careful calculation nets a withdrawal of $200. You didn’t want that $200, but now it will show up on your next credit card statement, not with the other transactions but in its own special section called Cash Advances. Swanky. Swanky is expensive however. Not only will you be charged a higher rate of interest, but you’ll probably blow through the money because that’s what you do with the money in your pocket. That attractive co-worker thing was just a fantasy, and so you stop in the grocery store and salve your wounds with things you normally wouldn’t buy. You get the Haagen Dazs rather than the store brand. You aren’t going to put this money temporarily into your savings account. You’ll blow through it like a hurricane. And the worst news is yet to come. Not only is there a fee, and not only will you feel compelled to spend it, but the interest rate on cash advances is significantly higher than your interest rate for purchases. You may pay 12% on purchases and twice that amount on cash advances. Yes, cash advance interest rates can exceed 20%. But that’s not the worst news. When you purchase an item with your credit card you have a grace period during which you don’t pay interest on the amount of that purchase. So, if you pay your balance completely and on time, theoretically you won’t be paying any interest charges. Not so with cash advances. Cash advances begin to cost you money the moment you pull the funds from the ATM. But that’s not the worst news. The worst news is that a handful of the credit card companies apply your monthly payment to the least expensive money that you owe them first. That is, if you owe them $3000 for purchases at a 12% rate and $500 for a cash advance at a 20% rate, they apply your $1000 payment to your purchases, and until you have completely paid off your purchases you will not pay off any of the $500 cash advance for which you may be paying – at 20% - $100 a month. Now that’s truly ugly. You should not use credit card cash advances unless it is a real emergency.