By David
Credit card money, or a cash advance, as it is often referred to is an interesting option available to card holders, though not always a great one. Let us take a look at a few of the pitfalls associated with this “credit card money” and see if we can understand some of the common problems people encounter and when — if ever — is an appropriate time to utilize this option.
Fees and interest rates
The average credit card interest rate runs at about 15%. Credit card money or a cash advance has its own associated fees and interest rates that exceed the cards already high interest rate making this option a convenient, but expensive one.
The first thing to note here are the associated fees that go along with obtaining a cash advance. These fees can be between 2% to 4% of the amount borrowed which means if you need to borrow $1,000, conservatively you’re looking at $20 added to your principle immediately. Need to borrow more? Then your fee will be even higher.
Next we should note the higher interest rates associated with getting ahold of credit card money. Even with great credit and an outstanding 10.4% APR on your credit card, if you decide you need a cash advance the APR on it will be between 24% and 40%! At best you will be paying about 2.5x what you would be normally. Worse still is the fact that many card companies rearrange what you’re paying on so that the low interest rate purchases get paid on first leaving the high interest rate cash advance to sit in the back untouched compounding enormous amounts of interest.
Combine these factors with the knowledge that in most cases your 30 day grace period is forfeited for a cash advance. This means that you’re being charged interest before you even have the cash in your hand!
It’s pretty much a foregone conclusion that getting this credit card money is not always a smart financial decision with the exception of a couple specific cases:
- Purchasing an item from an individual – Perhaps you need to buy an item from an individual who obviously will not be able to take a credit card and you don’t currently have the cash for the item, but will within a month or less. In this case using credit card money is a viable option assuming the item being purchased is something you need and you’re disciplined enough to get it paid back quickly.
- In an emergency – Your car broke down in the middle of nowhere, the mechanic only takes cash, and, wouldn’t you know it, all you have in your wallet are your credit cards. In this or similar circumstances utilizing credit card money can be a viable option, but still should be considered only as a last resort.
Armed with this information you can be sure you’re prepared to resist the temptation to use credit card money (cash advance) for anything but the most dire, or most appropriate of circumstances.
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