Credit cards can be a tool to keep your finances up to date in difficult times. But not every expense can be covered with a credit card. For example, you may not be able to charge your rental from a credit card, so consider taking a cash advance from your credit card to pay the bill. It’s a natural choice, but probably not the best idea for your long-term financial health.
A new report from CreditCards.com Reveals Why: The website looked at 100 credit cards and determined an average cash APR of 24.8%. The average interest rate for regular purchases? 19.84%, which seems paltry by comparison.
Creditcards.com industry analyst Ted Rossman notes Which a credit card that provides an interest rate range for consumers depending on their credit rating may only offer one advance percentage.
Is it better than one payday loan with an interest rate up three digits? Certainly.
But it turns out The higher interest on a cash advance is just one of the ways you pay that advance. You will too pay a fee for obtaining that cash advance through a ATM or one convenience control. Rossman writes that the typical down payment fee is $ 10 or 5% of the down payment amount – whichever is the higher. Besides, there is none grace period on a cash advance as there is with a normal credit card purchase. The interest immediately starts to accrue.
One more drawback: your card will likely apply your minimum payment first to the lowest interest, meaning you’ll pay off your regular purchases before your cash advance so you can build up that higher interest rate. Only when you pay more than your minimum payment is the extra spent on your higher interest balance, Rossman wrotetes.
Here’s an example of how one cash advance can complicate your finances from the report:
Let’s say you take an advance of $ 1,000 in cash and aim to pay it off within 30 days. If your card charges the usual 5% prepayment fee, that’s $ 50. In addition, the average APR cash advance (24.80%) owes about $ 21 in interest. That’s an extra $ 71 in just one month – and the math is a lot worse when you carry the balance around longer.
If you make only minimal payments for that $ 1,000 cash advance, you’ll be in debt for more than six years and end up paying a total of about $ 2,000.
If you need really cold, hard cash right now, a cheaper option is to go with the local bank or credit union where you need to secure your checking account a personal loan.
It may be more difficult to get a loan at this point lenders have tightened their standards so to manage some of the risk of handing out cash during an international crisis. But if you are in good standing with your bank, you may have better luck there than with a standalone personal credit.
Or ask the parties to whom you own money whether you can divide your debt in installments. Many sellers would prefer money that comes in late, you have not paid at all.
If you’re going down the credit card advance route, make sure you have a plan to refund the money as soon as possible. Taking an advance is a risky move, but if it’s a short term fix and you have it a concrete, foolproof plan to wipe out that new debt quickly can help you get through a rough patch.