It’s the end of the month and you just need a few toonies to get you through pay day… so you take your credit card down to the nearest ABM. You easily walk away with cash in hand, now able to pay rent or eat at your favourite ‘cash only’ cafe.
That was simple enough, eh? Like a trustworthy friend, your credit card was there for you in your time of need. There to loan you cash, no questions asked.
You may think your card was looking out for you, but, what you may not realize is once you removed that cash from the ABM, your card just transformed into a dangerous Loan Shark!
Getting Cash From Your Card
Today, most credit card offers include Cash Advances. This feature allows you to convert your credit into cash by withdrawing money at banks or ABMs – or using cheques issued by your credit card company. When you use one of these features, your card turns that credit transaction into cash and charges you a certain interest rate.
Most of the time, that interest rate is MUCH higher than your annual purchase rate. Cash advance rates range anywhere from 11.9% to close to 25% and begin accruing interest immediately!
Most credit card companies do not offer grace periods on cash advances so the longer you take to pay it back, the more it will cost.
In addition to paying a high interest rate on your cash advance, you may be charged a fee for just making the transaction. The fee is generally 1% to 4% of the amount advanced.
Let’s Do The Math
Say you take an cash advance of $500 from your low rate interest credit card that charges you 20% on cash advances and a fee of 2% for the actual transaction. You eventually pay it back in 90 days. How much will that $500 end up costing in the end?
Cash Advance Amount = $500
Interest Accrued Over 90 days = $24.65
Transaction Fee = $10.00
Total Cost = $534.65
As you can see, it’s costing you almost $35.00 for the convenience of having your credit card front you $500. Imagine what the cost would be if you took longer to pay it back – or borrowed even more!
Is A Cash Advance Worth It?
Well, would you borrow money from a Loan Shark?
Unfortunately, when you take a cash advance from your card, that’s essentially what you’re doing – borrowing from a Loan Shark. Your credit card loans you the cash at a very high interest rate, and the longer you take to pay it back, the more you risk your financial safety.
Getting quick cash at a “Payday Loan” store is very similar to a cash advance from your credit card, but is generally much more expensive. Most quick cash options create a vicious cycle, where you start borrowing more to pay the previous loan. Due to the high interest rates and associated fees, it’s hard to catch up, so you end up borrowing again next month – Resulting in a vicious, never ending cycle of debt!
Avoid getting stuck in a ‘Sharknado’ of credit card debt and stay away from cash advances. They’re just not worth the risk, nor the cost. If you need cash for an emergency, try to get it elsewhere before you head to the ABM with your credit card in hand.
