Credit cards can be a tool to keep your finances afloat during tough times. But not every expense can be covered with a credit card. Maybe, for example, you can’t charge your rent to a credit card, so you consider taking a cash advance from your credit card to pay the bill instead. It’s a logical 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 advance APR of 24.8%. The average interest rate for regular purchases? 19.84%, which seems paltry in comparison.
Creditcards.com industry analyst Ted Rossman notes that a credit card that offers an interest rate range for consumers depending on their creditworthiness may only offer one cash-advance rate.
Is it better than a payday loan with an interest rate up in the triple digits? Sure.
But it turns out the higher interest rate on a cash advance is just one of the ways you’ll pay for that advance. You’ll also pay a fee for getting that cash advance via an ATM or a convenience check. Rossman writes that the typical advance fee is $10 or 5% of the advance amount—whichever is higher. On top of that, there’s no grace period on a cash advance as there is on a normal credit card purchase. Interest starts accruing right away.
One more drawback: your card will probably apply your minimum payment to the lowest interest rate first—meaning you’ll pay off your regular purchases before your cash advance, letting that higher interest build up. It’s only if you pay above your minimum payment that the extra gets put toward your higher-interest balance, Rossman writes.
Here’s an example of how one cash advance can complicate your finances, taken from the report:
Let’s say you take out a $1,000 cash advance and aim to pay it off in 30 days. If your card charges the typical 5% cash advance fee, that’s $50. Plus, at the average cash advance APR (24.80%), you’ll owe about $21 in interest. That’s an extra $71 in just one month – and the math is far worse if you carry the balance for longer.
If you only make minimum payments toward that $1,000 cash advance, you’ll be in debt for more than six years and you’ll end up paying a grand total of about $2,000.
If you truly need cold, hard cash right now, a cheaper option would be to talk to the local bank or credit union where you have your checking account to secure a personal loan.
It can be harder to get a loan right now as lenders have tightened their standards in order to manage some of the risk of handing out cash during an international crisis. But if you’re in good standing with your bank, you may have better luck there than you would with a standalone personal loan outlet.
Or, ask the parties to whom you own money if you can divide what you owe into installments. Many vendors would rather have money coming in on a delayed schedule than have you not pay at all.
If you do go the route of a credit card cash advance, make sure you have a plan to pay back the funds ASAP. Taking an advance is a risky move, but if it’s a short-term solution and you have a concrete, foolproof plan to wipe out that new debt quickly, it can help you get through a rough patch.