5 Reasons Cash Advances Are A Bad Idea

By Jonathan (MYC), on December 2, 2008

You need some cash, you have a credit card, and the logical solution seems to be to get a cash advance using your credit card. You can pay it back later, right? The truth is that cash advances are not a good idea in most instances. Yes, there are times when it seems like a cash advance is the way to go, but in most cases it’s best to avoid this particular feature on your card.

Why not use cash advances? Here are a few reasons:

1. The interest rate is mighty high.

You may not realize this, but as a rule, the interest rate on cash advances is higher than the interest rate for purchases. You may have a fantastic rate for purchases, but use your card for a cash advance and you may wind up with an interest rate on the cash advance that is flirting with 20% interest rate or higher.

2. There is no grace period.

When you make a purchase on your credit card there is usually a grace period that allows you to pay the balance before any interest is accrued. This isn’t usually the situation with cash advances. Interest on cash advances starts right away, so by the time your statement comes you’ve already been charged interest on the cash advance.

3. Credit cards maximize the interest you pay by finagling your payment.

When you send your payment in, the credit card company applies it to the portion of your balance with the lowest interest rate first. In other words, it’s going to take you longer to pay off your high interest cash advance than your regular purchases.

4. The credit card company isn’t the only one tacking fees onto the transaction.

If you walk into a bank and request a cash advance off your credit card you might find yourself paying the bank for assisting you with the transaction. You don’t even have the cash in your hand yet, but you’re already handing some it over to the bank.

5. There are better ways to get cash.

This could be a sign of a bigger problem if you are turning to credit card cash advances out of necessity because you can’t get your hands on any money. What is going on with your finances that you don’t have access to cash in an emergency? You shouldn’t fall into the pattern of needing your credit card to bail you out when you need some cash because you’re setting yourself up for trouble.

Keep in mind that credit card cash advances aren’t limited to ATM withdrawals or pulling cash out at a financial institution. Convenience checks that credit card companies send you may also have all the same
trappings as cash advances unless they fall under a promotional interest rate.

In any case, it’s best to avoid cash advances. If you must use them be sure you understand all the extra fees that may be involved in the transaction. Cash advances should never be an ongoing solution to financial difficulties. If you find that you’re pulling cash off your card constantly, this is a sign that something has to change.

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Jonathan is the owner of Master Your Card (to help you master your credit cards), and more recently, Debt Loans (an Aussie personal finance blog). Check out his blogs and put your credit card debt down for good.

All posts by Jonathan (MYC)

9 Comments

poor boomer
December 3, 2008, 0:16

What’s going on with my finances is very low income. Not much I can do about that if I can’t get a job.
Miranda
December 3, 2008, 8:09

Great post. So many of us forget that using a cash advance is not actually our money. It’s borrowed. And at a very high interest rate.
vilkri
December 3, 2008, 21:23

I could not agree more. Fortunately I am not in danger of ever using a cash advance on my credit card. I don’t know the PIN for any of my credit cards. It is hard enough for me to remember the PIN for my bank card.
Pinyo
December 4, 2008, 12:06

@Vilkri — I am the same way. I have no idea what my credit card PINs are and I have no plan of ever using the convenient check (yes, it’s a convenient way for the CC companies to rob you!).
Ed at AAFR
December 5, 2008, 15:17

Couldn’t agree with you more. If you find yourself needing to resort to a cash advance from a credit card to buy something you need, then (1) something is very, very wrong with your financial situation, and (2) it’s going to get worse as the interest charges pile up. Avoid cash advances like the plague; and if you find yourself “needing” one, take a cold, hard look at what, exactly, has put you in the financial position you’re in–and do something about it.
Andrew @ Retire at 40
December 7, 2008, 5:57

I think the fact that there is no grace period and that the higher interest kicks in straight away makes for a sad credit card statement at the end of the month.
Make Friends, Earn Money
December 7, 2008, 13:10

interest rates on cash advances are always at least 5-10% higher than the standard APR for purchases. However this is rarely publicised in adverts and is tucked away in the small print. It also makes no sense because why should there be a difference, afterall whether you take a cash advance or pay for goods and services you are still spending money on your card. The only thing that I can think of is that the banks charge credit companies higher interest.
Pinyo
December 10, 2008, 0:15

@Ed – Well said.
Robert
June 2, 2009, 3:30

I think the fact that there is no grace period and that the higher interest kicks in straight away makes for a sad credit card statement at the end of the month. However this is rarely publicized in adverts and is tucked away in the small print

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