Use Your Cash Advances Wisely

Cash Advances Wisely

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.

The Cost of Buying Cash

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.