Why you should avoid credit card cash advances

A credit card advance can help you get out of a jam in seconds flat. But this quick financial fix also comes with some real dangers, risks and associated costs. Laurie Campbell, executive director of Credit Canada, a credit counselling and debt management consultancy, explains the pitfalls of taking out a cash advance on your credit card.

What are some of the advantages of credit card advances?
"Immediate cash is really the only advantage," says Campbell. After all, she warns that a cash advance can give you instant access to cold, hard cash but you'll pay handsomely for the convenience.

What are some of the disadvantages of credit card advances?
According to Campbell, "the high interest that occurs on most credit cards, which typically sits at 19 per cent" is the greatest credit card cash advance pitfall. In fact, the interest rate for cash advances is often several percentage points higher than the normal purchase interest rate associated with everyday purchases and can run upwards of 25 per cent.

What's more, because "there is no grace period," Campbell warns that cash advances begin accruing interest immediately, even if you pay off your credit card balance the moment your statement arrives in the mail. "People must remember -- and a lot simply do not realize, that there is no grace period," says Campbell. "Interest starts from the time you get your cash advance."

How can the fees associated with credit card advances impact consumers?
While "high cost is the biggest factor," Campbell warns that taking out a credit card advance can become a terrible habit. "Once you begin the cycle of cash advances, it is difficult to get out of. It is a very expensive form of credit," she warns.

What are some smarter alternatives to credit card advances if you need cash fast?
Campbell advises: "A line of credit is a much cheaper form of credit for people. And avoid payday loan companies and overdraft as they are also very expensive forms of cash."

What lessons should be learned if you find yourself constantly in need of a credit card cash advance?
Taking out a credit card cash advance often "speaks to the need for an emergency fund so that people have that to tap into if they have an emergency and need cash fast," says Campbell. "Unfortunately many people are not planning ahead and thinking about the need to have money set aside in case something happens."

But that's not all. Campbell also emphasizes "the need for a greater understanding of how to manage your money more appropriately so you don't get in the situation of high-interest borrowing which costs people a lot more money in the long run."

See related: Gail Vax-Oxlade talks money management; Q&A with personal finance author Margot Bai; Drowing in debt? How to tell

Published March 4, 2011

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