Sometimes plastic just won’t cut it.
We’ve all been there before: the time to pay has come, and only then do you realize you have zero cash in your wallet—or your bank account. Even worse? They don’t take credit cards. What’s a credit-savvy person to do?
If you’re a credit card holder, you’ve undoubtedly seen the option for cash advances each time you go to the ATM. Somewhere in the back of your mind, you know they are not a good idea, but you’re not exactly sure why. Most of the time, it’s not even a temptation because you keep enough in your checking account to continue making withdrawals. But your paycheck hasn’t cleared yet and you need the cash right now. Should you bite the bullet and take the cash advance?
After all, they wouldn’t offer it if it really were such a terrible idea. Right?
Wrong.
In all but the most serious emergencies, cash advances are never a good idea.
The cash advance, as a concept, is the ultimate example of fixing a problem now only to suffer the consequences later. That’s because essentially they are the quickest loans you can get—and as we all know, easy money often comes with a steep price.Typical loans involve lenders who review your credit history, assess why you need the money, and carefully work out a repayment plan so they’ll be certain to get their money back. Cash advances cut out all of that legwork, which makes them riskier for the lender. So how do they guarantee they’ll recoup their losses?
By making cash advances extremely expensive for borrowers.
Here’s what you can expect if you take out a cash advance:
You’ll pay a fee for each advance.
Depending on your specific account, the fee can cost anywhere from 3 to 5 percent of the borrowed amount. And that doesn’t take into account interest.
You’ll be charged steep interest rates.
Normal credit cards often have an APR of around 15 percent. Cash advances, on the other hand, can easily add 10 percent to that, leaving you paying up to 25 percent—or even more—on the amount you borrow.
You’ll owe interest starting immediately.
With credit cards, you usually have a month’s worth of time to pay off your balance before interest starts to accrue. Not so with cash advances. You start owing interest on your loan as soon as it’s in your hand, which means the sooner you pay it off, the better.
It’s clear that cash advances are never your best option. So what alternatives do you have when you need cash but also want to steer clear of debt and a big dip in your credit report?
Opt for a different type of loan. While it’s not ideal, personal bank loans may offer lower interest rates than cash advance loans. They also require faster payoff, which saves you from the slippery slope of paying off your cash advance slowly with each monthly credit card payment.
Borrow from a friend or family member. But don’t go into a loan like this lightly, as it could spell out big problems for your relationship. Show your friend or family member that you’re a respectful, responsible borrower by writing up a contract and repayment plan that both of you agree to and sign.
Take proactive measures today. Whether this means stashing cash in your sock drawer or starting a second savings account, always keep enough liquid cash on hand for emergencies. And don’t forget to do your research ahead of time when traveling—many countries operate largely on cash-based economies.
Remember, cash advances are only okay if there is no other alternative to pay for a true emergency situation. Plan ahead and save smart, and you’ll steer clear of this financial pitfall.
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