A cash advance occurs when a consumer uses a credit card to withdraw money from an ATM rather than make purchases. Credit card companies often charge heavy fees for this privilege--in addition to a higher interest rate.
Cash Advances Carry High Interest Rates
The fine print of every credit card agreement contains all the terms and conditions of the card’s use. Buried within that fine print is the interest rate for cash advances. Credit card companies do not want borrowers to notice, but cash advances carry a much higher interest rate than standard credit card purchases.
Unsuspecting borrowers take advantage of the cash advance option never realizing that the rate for these transactions can actually be double that of simply using the card to make purchases directly. Interest rates are not the only danger that a cash advance presents, however. Fees and finance charges must also be considered.
Cash advances begin accruing interest from the moment the cash hits the consumer’s hand. There is no grace period for the accrual of interest. In addition, credit card companies typically issue a fee for the convenience of cash advances. This is in addition to the finance charges attached to most cash advance transactions and the bank fees ATMs levy to dispense the cash.
Credit Card Companies Apply Payments to Cash Advances Last
Credit card companies can opt to apply consumer credit card payments however they see fit. Since cash advance transactions accrue greater amounts of interest, it is more beneficial for companies to apply credit card payments to cash advance transactions last- and most do.
The interest from the cash advance grows rapidly. For consumers who pay only the minimum payment every month, this is a financially dangerous situation. Since the payment is applied to the lower interest balance first, the charges for the cash advance continue to grow. The charges can only be addressed when the standard card balance is paid in full.
For consumers who frequently use their credit cards, just one cash advance can be a financial death sentence. If the card is in continual use, unless the cash advance balance is paid in full, the interest on the transaction will continue to snowball. Over time, this interest can exceed the spending limit on the card- resulting in more fees and an even deeper financial hole for the consumer.
Cash Advance Balances can Damage Credit Scores Over Time
As if the dangerously high interest rates and fees were not enough, steadily growing credit card balances due to unpaid cash advances can seriously damage a credit score. A portion of the current credit scoring module is based on a ratio of the amount of debt a consumer currently has on his or her credit cards to the spending limit on those cards. This is referred to as a “debt to limit ratio.” If cash advance balances are not paid off quickly, the interest accrued will decrease the debt to limit ratio on the card- resulting in a lower credit score.
Credit card company regulations regarding fees and interest charges are common and legal. Because of this, consumers must learn to protect themselves by staying informed and making wise financial choices. One extremely wise financial choice is to avoid cash advances at all costs.
 |
 |
