Top Reasons to Avoid Cash Advances
Are you caught in a financial bind? Whether you’ve been laid off from work, your home needs a major repair or your car breaks down, a credit card cash advance can seem like an easy way out. Credit card companies like to make cash advances as convenient as possible – you’ve probably received convenience cheques in the mail on more than one occasion. Credit card companies like to market them as a lifeline for a rainy day.
While cash advances may seem like a good idea, they’re one of the most costly sources of credit available – aside from payday-type loans. Before you take a cash advance, it’s important to be aware why cash advances should only be used as a last resort.
What is a Cash Advance?
A cash advance is when you convert some of your credit into cash. Examples of cash advances include using “convenience cheques”, getting cash at an ABM, or other “cash-like” transactions. Cash-like transactions include lottery tickets, casino chips, wire transfers, money orders, and traveller’s cheques.
Why You Should Avoid Cash Advances
Cash advances are treated differently than regular credit card transactions. Here are the top reasons to avoid cash advances.
Fees: Cash advances don’t come cheap. When you make a cash advance, you’ll very often incur a fee. The fee is usually calculated as a percentage of the transaction. The typical fee is 1% to 3%. For example, if you withdraw $3,000, you’ll incur a fee of $30 to $90 – ouch! It can be even more costly if you withdraw funds from an ABM, where you’ll often incur additional ABM fees.
Interest: If you thought the fees on cash advances were bad, that’s nothing compared to the interest charges you’ll incur. You should know by now carrying a balance on your credit card is costly, but what you may not know is that cash advances are even more costly. Here’s why: interest rates on cash advances are usually much higher rates than regular transactions – up to 30% in some cases. As you can imagine, you can rack up debt pretty quickly, even if you only use a cash advance for a few days.
No Grace Period: Credit cards can be a great way to manage your monthly cash flow and earn points, as long as you use them responsibly by paying off your monthly balance in full. With purchase transactions you have a 21-day grace period after your statement date. With cash advances you don’t have that luxury – the moment you take a cash advance, interest starts accruing immediately. Since credit cards calculate interest based on your daily closing balance, you can accrue a lot of interest even before you receive your first statement.
No Rewards: If you were counting on reward points to help often the fees incurred with cash advances, think again. Since a cash advance is treated as a cash loan against your credit, rewards points aren’t awarded for cash advances.
For best results, use cash advances sparingly – if at all. When used, be sure to pay it off as soon as possible! Don’t wait for the bill to come, submit your payment when you can afford to pay it off.