Tuesday, May 6, 2014

Credit Card Cash Advances - A Word Of Caution


There are times when a credit card and the cash advance facility it offers can be literally a life saver. Imagine your pet has been hit by a car and you need emergency veterinary services but it is late at night and the vet only takes cash when making house calls. What if you go on a driving vacation and break down in some hick backwoods town like a clich├ęd Hollywood road movie? The mechanic only takes cash but there is an ATM down the street at the bank.

Emergencies aside, some people rely on cash advances to get them to payday. That can be ok if payday isn't too far away and their paycheck goes into the account the credit card operates off which it could do if your mortgage is set up that way. If not, then be ready to pay for the privilege!

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Most credit cards in America today charge between 14% to 21% interest on purchases. They charge an extra 1% to 7% on cash advances. Yes, spending on 'cash' costs more than spending on groceries, gas or geegaws! Credit card providers get to charge the merchant a fee for the purchase but they are the merchant when it comes to a cash advance and they are not about to charge themselves for the service, so they add it onto your bill.

This means you could possibly be paying as much as 21% to 28% for your cash advances. That can get expensive. Most cards allow between 60% and 90% of the credit limit to be withdrawn as cash. If your limit is $5,000 this means you could advance $4,500 of this and then have to pay it back at up to 28%! If you have purchases of $500 on top and thus, maxed out the card, you need to do more than make the minimum repayment or else you will be paying this off for the rest of your life. Keep in mind the repayments are allocated as the provider sees fit so they could allocate almost nothing against the cash portion and thus watch the interest rack up month after month.

An anecdotal couple we'll call Rob and Robin, as they are forever robbing Peter to pay Paul, decide they don't want to waste a year saving for a vacation to Hawaii. Instead, they will max out their three $5,000 credit cards and use the money to pay for flights, hotels, meals and everything. They pay half their vacation as purchases and get cash advances for the rest so they have some spending money. When they return from their $15,000 vacation of a lifetime, they put Plan B into action.

Rob and Robin took out one of those balance transfer credit card offers we all get hit with on a regular basis. This gives them six months interest free on all transferred balances, then it jumps to 19% but they figure they can pay most of it off in the six month honeymoon period. All goes well until Rob loses his job. Then at the end of the six months they find out the credit provider allocates most of each repayment to the purchases part of the transferred balance and very little to the cash advance part. After six months they have paid off a fair slice but they still owe all the cash advance portion ($7,500) and a few hundred of the purchases portion. Now the interest rate leaps to 19%, except for cash advances which has an extra 6% on top making it 25%. On just Robin's salary, they have been buying their gas and groceries with the available balance of their new card and now find that to be close to being maxed out once more.

One final thing to remember about cash advances. Credit cards allow a minimum of 21 days interest free (grace period), but only on purchases. Some offer up to 55 days grace, but cash advances attract interest from the moment you draw the cash from the ATM. They also attract a fee just for the fun of it from 1% To 4% so that $4,500 cash advance with an average 3% fee will cost $150 before the interest is added to it. Make no mistake, cash advances are great for emergencies but emergencies are the only time you can honestly justify the huge added expense of such a facility.

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