Credit Card Cash Advances – Help or Hurt?

Jun 22, 2010

You’ve probably received plenty of offers from your credit card issuer – urging you to use one of the “handy checks enclosed” to fund a vacation, buy new furniture, or splurge on a new wardrobe.

Sometimes they even fill in the amount on one of the checks – encouraging you to borrow an additional $1,000, $2,000 or even $5,000. Sometimes those checks come with an initial low interest period, just to sweeten the offer and encourage you to take advantage of the offer.

If you actually need to borrow money at that time, the offer can be a welcome relief. (But please don’t fall for the “splurge” enticement – it will come back to haunt you!)

You CAN use these credit card cash advances to help your financial situation, but only if you use them carefully.

Let’s take a look at the situation:

If you have a credit card balance on another card and the interest has suddenly increased from 5.9% to 25.9%, then using a cash advance check to pay off the other balance can be a wise decision. But… first look at the fee charged for the cash advance. Then look at the term. Will the cash advance check at a low rate keep that low rate long enough for you to pay off the balance, or will it revert to a high interest rate in just a few short months?

I’ve seen credit card offers charging a fee of 3% for the cash advance at 1.9% interest – and switching to 19.9% after only 60 days!

Read the fine print – all of it.

New regulations signed into law this summer will require banks to keep promotional interest rates in effect for 6 months – but will even that be long enough for you to pay off the balance? And what interest rate will you pay if you still have an outstanding balance after those 6 months?

Next, look at the interest rate you pay on purchases. Your credit card issuer may be offering you a low rate on that cash advance, but a high rate on purchases. And under current terms, your payments will apply to the balance with the lowest interest rate until it is paid in full – then will apply to high interest balances. Under the terms of some cards, your entire payment applies to the lowest rate balance and its interest. Interest on the higher rate balance continues to accrue, adding to that high interest rate balance every month.

This will change under the new regulations, but they won’t take effect until next year, so be careful.

If you use a card for a cash advance, you’re probably better off not using that card for anything else.

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