Gather Little by Little

Photo by: catatronic

The following is a guest post by Jonathan from Master Your Card, a blog about credit cards and mastering them before they master you. If you like this post, consider subscribing to his RSS feed.

There you are, broke and in need of cash. Your bank account is so empty there’s an echo and even the sofa cushions have no change. But wait – there’s your shiny credit card. All you need to do is head to an ATM or cash one of those little checks your credit card company provides so conveniently to get some cash.

Wait a minute. Before you go rejoicing in your filthy lucre, think about what cash advances really mean for you:

1. Big fees – Most credit card companies want you to know about cash advances because credit card companies make big bucks on these sorts of transactions. Why would they want your interest at the end of the month when they can charge you even more right now? That convenient cash usually comes with a hefty fee or a larger-than-your-credit-card-rate interest. Most credit card companies charge a few interest points more for advances than for regular credit card charges, so when you get a credit card cash advance expect to pay 20% to 25%. Some cards even charge both a fee and interest – and there is no grace period, so you are stuck with the charges even if you pay the advance off tomorrow. A few companies do not charge anything for cash advances, but these are very rare, so hunt up that credit card agreement and read all that tiny print.
2. Paying interest on interest – If you keep your credit card pristine by paying it off in full each month, you may not have much to worry about (other than those high fees and exorbitant interest) but poor you if you carry a balance. Most credit card companies use any money you pay on your card towards your card purchases before they put them towards your cash advances. This means that you will enjoy a higher finance charge until you pay your credit card off in full. If you carry a balance on your credit card, do not even think of getting a cash advance unless it is an absolute emergency.
3. Even more fees – The ATM machine is obviously the most convenient place to get your cash advance, but guess what? You get charged an additional ATM fee for advances. This is on top of the money you are already paying to your credit card company. And be extra careful with ATM’s in clubs – surcharges can be as high as $5 for a single $20 withdrawal!
4. The sneaky cash advance – Those “credit card checks” that your credit card company sends you usually are subject to the same fees and interest as cash advances. Transferring cash to your account from your credit card can also count as a cash advance. Make sure that you understand all the fees for every credit card transaction so that you aren’t taken by surprise.

Are cash advances pure evil? No. In an emergency when you have no other options, they can be a lifesaver. Just be sure that you only use them in true emergencies and pay off your credit card immediately in full to avoid compounding interest.