It’s just so easy to walk up to an ATM and get the cash you need. If it’s coming out of your checking account, that’s OK. But if you’re getting a cash advance on a credit card, stop right there!
I have no idea what loan sharks are charging these days, but I’m guessing that the actual cost of a cash advance isn’t a much better deal. Here are three awfully good reasons you should “just say no” to cash advances:
#1: No grace period
On purchases, you usually get a grace period. If you pay within a certain period of time and you aren’t carrying a balance from the previous month, you don’t have to pay a finance charge. But with a cash advance there’s no grace period. This means that as soon as you swipe your card, the interest clock starts ticking.
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#2: High APRs
The Credit CARD Act has done some nice things for consumers, but it doesn’t address the interest rates on cash advances. Typically, APRs on cash advances range from 19 per cent to 26 per cent. The APR I see most often is around 25 per cent. If you get a cash advance of $2,000 and it takes you a year to pay it back, you’ll pay around $500 in interest.
#3: Cash advance fees
You have to pay a fee upfront when you get your money. These fees range from 2 per cent to 5 per cent. A Consumer Action survey showed that almost 90 per cent of cards have cash advance fees and the average rate is 3.81 per cent. To make the maths easy (on all of us!), let’s round that up to 4 per cent. On that $2,000 cash advance, you pay an $80 fee.
So that $2,000 cash advance ends up costing you $2,580 to borrow for one year. That’s $580 you could be putting in your emergency fund or in your child’s college fund. Or even toward a vacation.
Have you ever gotten a cash advance? If so, how did it work out for you?
Image: Alpha, via Flickr.com