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Your credit card is a powerful tool for the management of your financial life. It can help you to extend the value of the products and services you need by obtaining them before paying for them. It can reduce the need for cash or check in places far from home, and allow you to conduct personal and professional business by phone, mail or Internet over long distances.
Like all-powerful tools, though, it needs to be used carefully. And that′s especially important when using the ultimate power of your credit card: it′s ability to give you immediate cash in large amounts. The two most popular ways of obtaining cash from credit cards are through the ATM machine at your local bank, or by filling out and cashing a check-like document that is often attached to your monthly credit card statement. Last year the amount of cash borrowed from just one major credit card company totaled more than 104 billion dollars. That was an eight percent increase over the previous year, and it tells us that credit card users are increasingly seeing the easy use of plastic as a substitute for the discipline of using banks and credit unions for borrowing.
Credit card companies in turn are increasingly willing to loan cash. It can be a very valuable service for their customers. But credit card companies are also increasing the fees and interest charges for cash advance. Your monthly statement gives you some of the fine print on how those charges are billed, but in most cases it doesn′t tell you what those charges are. If you don′t know it′s always a good idea to call the customer service number on your statement and ask. It′s no different than shopping for the best terms on a loan among banks and credit unions before signing on the dotted line.
When you use your credit card to buy new shoes or the latest CDs those products are yours to keep. You can use them for years to come and pay for them over a few months if you wish. But when you use your credit card for cash advance to pay for daily necessities like groceries and gasoline y ou will pay much more for that privilege. And you will have to give it all back as quickly as you can.
If you borrow $500 from one of the major credit card companies in the United States at contemporary rates, for example, you will be charged 3% of that amount (or a minimum of $5 for smaller loans) as an upfront transaction fee. You′re interest rate (APR) for the loan will be set at 19.9%. If you determine to pay off the loan in four months your costs in fees and interest for the purchase of $500 will be $35.88 or more than 7% of the loan amount. If you pay it off in 8 months the cost will be $53.24 or nearly 11% of the loan amount.
But that's not all. If you read the small print on your statement you will learn that in most cases payments you make to your credit card company will be applied first to lower interest charge purchases before they begin to erase your debt for higher interest borrowing of cash. For example: If your credit card balance of $1000 includes a $500 cash advance and you pay back only $200 per month it will be three months before your payments begin to cover the advance That′s three more months that the credit card company can charge you 19.9% interest on your original purchase of cash.
Why does a credit card company with a typical 12% APR charge for goods and services charge nearly 20% plus fees for cash? They say that it is because cash transactions which require delivery of a product by the card company - cost more to process than other purchases, and because frequent users of cash advance are more likely to default in repayment of their loans.
Cash advance can be very useful in many cases, especially those that give you flexibility in managing your day-to-day life. But you have to plan ahead if you are going to use the service. First, be sure you understand the rules and fees. Second, save on interest charges by having a plan in place to repay the money and its additional fees and interest at a definite time in the near future. Credit card companies will be the first to tell you that this is a service to be used only as necessary and with a disciplined schedule for repayment. They know that those borrowers who don′t have a plan to repay the cash advance in a timely way are more likely to fail to repay it at all.
How can you use cash advance to enhance your financial health and power? Most credit counselors know that the more discipline you can gain over the ways you earn, spend, invest and save the more you can make your money grow and create the assets you will need as a foundation for life′s many pleasures and surprises. Those same counselors will tell you that the best lesson you can learn from the use of cash advance is that if you need to use it often especially to pay for essentials like groceries and gasoline something is wrong in the financial management of your life, and it′s time to find a better strategy for earning and spending your money.
When that strategy is working well for you, the next time you go to your local ATM to get cash you will be able to use a debit card, instead of a credit card, and take the money from your own assets rather than borrow it from someone else.