It’s possible to think of reasons for getting a cash advance with a credit card. Maybe your car is broken down in the dead of night, and you meet a tow truck driver who inexplicably won’t accept credit cards. Maybe you owe a guy named Knuckles money, and he’ll only accept cash. Or, more likely, you have an automatic withdrawal coming out of your bank account and you’re fearful of it going into overdraft and getting a raft of fees; to plug the hole, the credit card cash advance seems like the best option.
But cash advances are expensive, and because of that, experts advise you avoid them.
[See: 10 Completely Careless Credit Card Mistakes You’re Making.]
“Taking a cash advance from your credit card is a terrible idea. Would you pay someone to flog you? A cash advance is akin to that scenario,” says Rakesh Gupta, associate professor at the Adelphi University Robert B. Willumstad School of Business in New York City. Gupta designed and teaches “Your Money AND Your Life,” a seminar for college freshmen.
Why are cash advances to be avoided? It really boils down to three reasons.
Fees. Many credit cards have a cash advance fee with that cash loan. Typically, you’ll be charged $10 or 5 percent of the cash you’re borrowing, and to add insult to injury, you’ll pay whichever is greater. So if you just need a little cash and take out an advance of $50, you’ll be charged $10, since 5 percent of $50 would be $2.50. If you needed something more substantial, like a cash advance of $400, instead of a $10 cash advance fee, you’d spend $20.
You’ll also be excited to learn that you may also be charged an ATM fee, depending on which bank’s ATM you use.
And be a little wary of the occasional credit card that brags about not having a fee. While that is noteworthy, check out the interest. It’s probably high enough that the credit card is more than recouping the lost income from the lack of a fee.
Interest. The fees are child’s play to the interest you’ll pay for a cash advance. When you buy anything using a credit card, you’re given a grace period of usually around 21 to 25 days after the statement closing date. In other words, if you make your payment by your due date, you’ve just been given an interest-free loan.
But with a credit card cash advance, from the second the ATM spits out the money, that isn’t the case.
“Interest starts accruing immediately, and there is no grace period. Unlike a credit card, cash advance interest accrues daily,” says Zack Friedman, founder and CEO of Make Lemonade, a personal finance website that offers products and tools to help consumers save money. Friedman is based in New York City.
Last May, CreditCards.com surveyed the terms of cash advances for 100 credit cards and found that the average cash advance APR is 23.68 percent, whereas the average purchase APR is 15.79 percent. It also doesn’t matter if you have stellar credit, the survey found — that won’t reduce the interest you pay on a cash advance. The survey also noted that you won’t get any points, miles or rewards by taking out a cash advance and paying it back.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
It could send a bad sign to your credit issuer and even hurt your credit score. That’s right. Even though credit cards offer cash advances as a helpful feature, the companies don’t necessarily want to see you using them, according to John Ganotis, founder of CreditCardInsider.com.
“Think about it this way,” he says. “A credit card issuer grants you a credit limit, and you can use all of it if you really want to. But when you max out your cards, that’s seen as risky behavior, even though you’re just using a service the bank offers.”
So if you use a cash advance once in a blue moon, it probably won’t hurt you, especially if you don’t come close to maxing out your card. But it isn’t a habit you want to adopt. Lenders will notice, Ganotis says.
“If I were to loan money to someone and I’m waiting to get paid back, but then I find out the person just got a payday loan, I may get more nervous that I’m not going to get paid back on time. I may decide not to loan that person any more money as a result. Similarly, a bank may see that a customer is using a cash advance line and deem that risky behavior. As a result, the bank may decide to lower the customer’s credit limit to mitigate that risk, for example,” he says.
[See: 12 Simple Ways to Raise Your Credit Score.]
Ganotis also points out that if you borrow a significant amount of cash, that could lower your credit utilization ratio, which could ding your credit score. That is, if you have a $1,000 credit limit and you’ve borrowed $200, and then you borrow $600 in cash, you’re borrowing 80 percent of your limit. Lenders like to see consumers with a 30 percent or less credit utilization ratio.
In short, if you have the mindset that cash advances aren’t any big deal, experts say otherwise.
“I think cash advances on a credit card are a terrible idea and should only be used as an absolute last resort,” Ganotis says.
“It’s better to exhaust other options first, such as taking a personal loan from your bank, overdrafting on your checking account, or even suffering the embarrassment of asking family and friends,” Gupta says.
Of course, it may depend on how much you’ll overdraft on your checking account or what financial and emotional pain you’ll receive if you don’t get that cash advance. It’s easy for experts and a writer to tell you what you shouldn’t do. Maybe a credit card cash advance is the best of your bad options.
But it should never be your first option.
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Why You Should Avoid Cash Advances on Credit Cards originally appeared on usnews.com