Here’s How Much It Actually Costs to Get Cash by Credit Card
Credit cards can be a tool to keep your finances afloat during difficult times. But not all expenses can be covered by a credit card. For example, you may not be able to charge rent on a credit card, so you can instead take a cash advance from your credit card to pay the bill. It’s a logical choice, but probably not the best option for your long-term financial health.
A new report from CreditCards.com shows why: The website looked at 100 credit cards and found an average annual cash advance rate of 24.8%. Average interest rate on regular purchases? 19.84%, which for comparison seems negligible.
Creditcards.com industry analyst Ted Rossman notes that a credit card that offers a range of interest rates to consumers based on creditworthiness may only offer one cash advance.
What’s better than a three-digit interest rate payday loan ? Certainly.
But it turns out that a higher interest rate on the cash advance is just one way you’ll pay for that advance. You will also pay a fee to receive this cash advance through an ATM machine or convenience check. Rossman writes that a typical advance is $ 10 or 5% of the advance, whichever is greater. On top of that, there is no grace period for dispensing cash like with a regular credit card purchase. Interest begins to accrue immediately.
Another disadvantage: your card will likely apply your minimum payment to the lowest interest rate first – this means that you will pay for your recurring purchases before the cash advance is paid, allowing you to accumulate higher interest. Rossman writes that only if you pay in excess of your minimum payment, that additional amount goes to your balance with a higher interest rate.
Here’s an example of how one cash advance can complicate your finances, taken from a report:
Let’s say you take an advance of $ 1,000 and aim to pay it back within 30 days. If your card is charged the standard 5% cash advance fee, that’s $ 50. Also, with an average annual cash advance (24.80%), you owe about $ 21 in interest. That’s an extra $ 71 in just one month – and the math will be much worse if you wear the balance for longer.
If you only make the minimum payments against this $ 1,000 advance, you will be in debt for over six years and end up paying a total of about $ 2,000.
If you really need cold and cash right now, a cheaper option would be to contact your local bank or credit union where you have a checking account to secure your personal loan.
Getting a loan right now can be more difficult as lenders have tightened their standards to manage some of the risks of issuing cash during the international crisis. But if you have a good reputation with the bank, you may be more fortunate than with a single bank.
Or ask the parties to whom you own the money if you can divide your debt into parts. Many sellers would rather have money late than if you paid at all.
If you do choose to pick up cash by credit card, make sure you have a plan to disburse the funds as soon as possible. Taking an advance is a risky move, but if it’s a short-term solution and you have a concrete and reliable plan to pay off this new debt quickly, it can help you get through a tough time.