By Debra Pangestu
When you’re in a financial bind and in need of quick cash, taking a cash advance on your credit card may sound like a convenient way to get money; but there’s a price to pay for the convenience, and in the long run it is usually in your best interest to avoid a cash advance if possible.
What is a Cash Advance?
Essentially, a cash advance is a service provided by your credit card issuer that allows you to withdraw cash off your available credit card balance, either through an ATM or directly at a financial institution. Getting an advance off your credit card is a convenient way to obtain cash if you’re in a place where credit cards aren’t accepted as a form of payment, or if you don’t have enough money in your chequing account to cover an expense.
All you have to is walk up to an ATM machine, a financial institution, or use a convenience cheque provided by your credit card company, and you’ll have some cold hard cash in your hands. Your advance will be charged to your credit card almost like a regular credit card purchase, which you’ll pay off when you can.
Although a cash advance on your credit card is certainly easy and convenient, there are higher costs that go along with this form of borrowing which can end up costing you a lot more than you bargained for.
If you’re considering getting a cash advance in Canada, we’ve outlined some important things you should be aware of, as well as some alternative options worth considering.
There’s Almost Always an Upfront Cash Advance Fee
When you take an advance on your credit card, there’s almost always a cash advance fee you have to pay up front (you can see the cash advance fees that various Canadian credit cards charge here). A lot of consumers often wonder how to avoid cash advance fees, but unfortunately, there’s no way around it (except if you get a low interest rate card that doesn’t charge cash advance fees, but there aren’t a lot of these). How the convenience fee is calculated depends on your credit card provider; you may either pay a percentage of your transaction (often 1%) or a flat dollar amount (typically $2 or $3.50). If you take money from an ATM that is not part of your bank or credit union’s network, don’t forget that you’ll have to pay an ATM fee on top of the cash advance fee too.
Interest Rates Are Higher for Cash Advances
Many people are under the impression that a cash advance is treated the same way as everyday purchases, but this usually isn’t the case. On top of the cash advance service fee, you’ll also be charged a higher interest rate. Credit card companies often charge higher rates for cash advances than for purchases for two reasons:
Cash advances are a credit card convenience service a lot of people are willing to pay more for.
Using cash advances can potentially reflect desperation or and greater financial risk for the credit card company.
The cash advance interest is sometimes 5% to 8% higher than the normal rate charged for purchases, so if you’re paying 16% interest on your credit card purchases, you could pay up to 24% on your cash advance. Getting dinged 24% just to borrow money is a high price to pay, so before you take out a cash advance, ask yourself whether you’ve exhausted all your other options, which we’ll discuss in a bit.
Cash Advances Don’t Have a Grace Period
Credit card purchases have a grace period in which you’ll have about a month to pay back the money you borrowed interest free. However, most cash advances don’t have a grace period, and interest will start to accrue the same day you take your advance.
So, if someone were to take out a $800 cash advance on a credit card with a 1% cash advance fee and a 24% interest rate, and were to pay the amount back in 10 days, they would be charged $13.26 for borrowing the money (an $8 fee plus $5.26 in interest). This may not seem like a lot, however, borrowing $800 for 10 days for $13.26 works out to a 60% annual interest rate. Ouch!
Quick Cash Can Facilitate Harmful Financial Behaviours
While cash advance fees may be high, they’re not the most dangerous part of cash advances. In the example we just gave, someone may have used the $800 to help cover their rent and didn’t have the money to pay this off until they got their tax refund a year later. In this case, they would end up paying $200 in interest over the year. If things were tight before, it’s not like this person can really afford to give up $200. Being short $200 now can lead to more high interest borrowing, being short even more money, and result in even more expensive borrowing. You can see here that cash advances can act as a series of dominoes that can begin to fall and potentially create a downward spiral that is hard to get out of.
A credit card cash advance is a convenient way to gain access to funds, but in reality, this “easy money” is often only a quick fix to an underlying financial problem. Until we can remedy that problem, the borrowing cycle will likely continue, and it can spiral into financial problems in the future.
We often turn to cash advances and credit because we don’t know how to budget, how to save money, and how to live within our means. The more accustomed we are to getting cash advances during times we need money – whether it’s to cover the costs of an emergency or to pay rent – the less likely we are to learn how to responsibly manage our finances.
Although it may not seem like a big deal to take out a cash advance every now and then, if something unexpected happens – a job loss, an illness, or a major car repair – you can really get caught in an expensive borrowing cycle. As the interest rates and services fees accumulate, you’ll soon find yourself owing more than you can manage and before you know it, you’ll be digging yourself deeper into debt.
If you find that you consistently need cash advances to pay your bills and make ends meet each month, this is a big red flag that signals you need some help to work things out and get your finances back on track. This is what our Credit Counsellors help people with every day.
Cash Advances Can Unintentionally Trigger Higher Credit Card Interest Rates
Credit card companies pay attention to cash advances and some appear to view frequent use of them as a potential sign of financial problems. Many credit card companies are so concerned that they have now cut back their client’s cash advance limits so that many people now have a separate cash advance limit that is lower (often half) of their regular credit limit.
Some credit card companies also monitor at what time of the month you make cash withdrawals from your credit card and compare that to when you make the monthly payment on your card. If you make your payment within 72 hours of withdrawing cash from your credit card, they can assume you are using this money to make the card’s minimum payment. This can be interpreted as a sign of financial problems and increased risk to the credit card company. In response, some credit card companies can raise their cardholder’s interest rate to presumably help offset the increased risk.
Some Cash Advance Alternatives
Cash advances are an expensive way to borrow money, and if you’re not careful, you could find yourself paying more than what you bargained for. When you need cash in a pinch, there are other alternatives that may make more financial sense. Here are some to consider:
Use your credit card. If you need to pay a bill or make a purchase, if it’s possible put it on your credit card instead. You won’t pay an upfront fee, your interest rate will be lower, and you’ll have your normal 1-month grace period to pay back the balance interest free. If putting a purchase on your credit card isn’t an option – let’s say you’ve reached your limit – ask a friend or family member if they can put the purchase on their credit card, and commit to paying it off in 30 days or less.
Ask for a cash loan from your family or close friends. If credit cards aren’t an option, it may be time to swallow your pride and ask someone you know and trust for a cash money loan. But, it’s also important to keep in mind that money can affect relationships, and if you don’t make good on your promise to pay back the loan on time, that relationship can be damaged.
Get a personal loan from a bank or a credit union. The only downside with this is that you’ll need good credit to qualify for an unsecured loan with a reasonable interest rate. If your credit isn’t in great shape or if the bank requires some form of security or collateral that you don’t have, then this won’t be an option.
Ask for an advance on your paycheque. If you and your employer have a good relationship, they may be able to give you an advance on your next paycheque, and you’ll simply have to pay back the advance on the following payday. All workplaces vary, so depending on where you work, they may have established policies in place. A smaller business may be able to work something out, but larger employers may have policies and procedures to adhere to. Whatever the case, it certainly doesn’t hurt to ask. But just like borrowing money from your friends or family money, be cautious that you don’t make a habit of it.
If you’ve weighed your options and you believe getting a cash advance is still the best option for you in your current situation, make sure you know what the interest rate is and how much you’ll be paying in fees. It’s also important that you get a cash advance only for the amount you need, and that the card you’re taking the advance on has a low balance. If you use too much of your available credit, this affects your credit utilization which in turn will reduce your credit score. Lastly, it’s imperative that you pay back the cash advance the soonest you can, because interest starts to accrue the moment you take out the money.
The Bottom Line on Cash Advances
There are times when a cash advance may be necessary, like when you’re away on holiday and the pharmacy that sells the medication you need only accepts cash and your bank card won’t work. Cash advances should only be used in emergencies, and they shouldn’t be used on a regular basis. It also shouldn’t be your lifeline when an emergency strikes, because once you get into the cycle of high-interest borrowing, it can be difficult to get back out.
If you’re relying on advances to meet your day-to-day expenses, it’s time to take a good look at your finances and start to make changes. The best thing you can do to avoid taking a cash advance is to plan ahead, create a spending plan, find ways to reduce your expenses, possibly look for ways to increase your income, and start setting money aside in an emergency fund. That way, if you find yourself in a tough spot down the road and you need cash quickly, you’ll have a pool of money you can dip into without any penalty or high costs that set your finances back.
Knowing how to manage your money well makes a huge difference, and our accredited, non-profit credit counsellors can help you get started. They’ll go through your finances with you, and they’ll also help you put together a realistic budget so you can start living within your means and save money so you can avoid a cash advance in the future.
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