Dear Creditnet: I've been tempted to use the cash advance option on my credit card more than once, but have always found the necessary cash to scrape by when it came down to it.
Can you explain how cash advances work, and should I ever apply for one if my cash situation gets especially tight? Thanks in advance. - Chris from Austin, TX
Answer: Chris brings up an excellent question regarding cash advances. For those with short attention spans, here's my quick answer: Unless you're in serious need of cash - be it to pay your rent or something equally as dire - you should avoid taking out a cash advance with your credit card. And even then, I would try to exhaust other options for quick cash that carry lower interest rates if at all possible.
OK, so that's the short of it. Here's the long explanation of why you should avoid cash advances:
1.) High Interest
Most credit card cash advance interest rates are sky-high. More often than not, cash advance APR's hover in the high 20's even for good-to-excellent credit consumers. They also aren't applied to your 0 percent credit card intro period (if you have such a card), meaning no matter when or where you request a cash advance, you can expect to pay heavy interest immediately.The consequences of a cash advance might be beneficial in the short-term but dire over the long haul. Odds are that if you're having trouble putting together the necessary cash to get by, it's going to be exceedingly challenging to pay off that one-time cash advance. Plus there's the (pretty good) chance that your minimum payment could increase after taking out a cash advance, thus increasing the possibility that you could go late or default or an upcoming credit card payment.
Obviously, that's not going to help your financial situation, either. That said, it's important to note that credit card issuers are required to apply any payment made over the minimum to your highest interest rate, meaning the cash advance will become the priority loan to pay off attached to your credit card account.
Cash advance interest rates are the number one reason I would advise against ever taking out a cash advance, but it's not the only reason.
2.) Fees
As you might expect, taking out a cash advance is not free. Generally, the cash advance fee runs anywhere from three to five percent of the amount of cash you're asking for an advance on. So a $500 cash advance at a 3 percent fee would cost $15. Plus, throw in ATM fees, bank fees and minimum interest charges and you're looking at around $20 simply to process the cash advance.
3.) There's usually a better option available
If your financial situation has lead you to the point of considering a cash advance as a viable option, then it may be time to consider other avenues of financial support to cut your losses before they're exacerbated further. Maybe you've got some old valuables lying around that could be worth selling on eBay or Amazon? Or perhaps you could speak to your local bank or credit union about applying for a small personal loan. Assuming your credit score is still solid and you have income to fall back on, you may qualify for a small personal loan with much lower interest than the one offered by your credit card.Lastly, if you're lucky enough to have understanding friends or family members, then you may want to consider sucking up your pride and asking them for a loan if you're truly dealing with a financial emergency. I advise this as the last option because even co-signing on loan can lead to relationship strain, let alone an all out loan. It's understandable that you would want to avoid this at all costs, but ultimately it could mean the difference between saving your credit or permanently damaging it.
OK, so there's the exhaustive long answer. Do not apply for a credit card cash advance unless you've exhausted all other avenues. These advances are costly both short term and long, and serve only to put a short-term band-aid on your personal finance situation rather than a long-term fix.
