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Credit Card Cash Advance

Credit Card Cash Advance: A High Interest Rate Debt Trap

A credit card is one of the most utilized financial tools for paying day-to-day expenses. Yet, they come with certain pitfalls—one of the most significant hazards being credit card cash advances.

While a cash advance can offer a lifeline in a financial emergency, the high interest rates, transaction fees, and lack of a payment grace period can turn a helpful tool into an expensive debt trap.

This article will tell you the true cost of a cash advance, the damage it does to your health in terms of finances, and some viable alternatives that can keep you from falling into this high-interest debt cycle.

What is a Credit Card Cash Advance?

A credit card cash advance lets cardholders draw cash against their available credit limit. This can be done via ATMs, over the counter with the help of a bank teller, or with an online transfer. This does not sound too complex, yet the terms and expenses regarding cash advances differ significantly from regular credit card purchases.

For example, cash advances are not the same as credit card cheques (also known as convenience or promotional cheques), even though both provide ways to access cash from your credit card. Credit card cheques are often mailed to cardholders and offer a convenient means of borrowing. While they may have promotional rates, those rates could expire after a very short time and revert to higher cash advance rates. Moreover, convenience cheques have fees and no grace period. They are as dangerous as regular cash advances but involve different costs and withdrawal methods.

Why Are Cash Advances So Costly?

Cash advances are often considered a costly and high-risk financial tool due to several factors:

  • High interest rates: Cash advances may carry interest rates several points higher than regular credit card purchases. Your typical purchase interest rate may be 19%, but the cash advance rate could reach 22% or higher (imposed by the card issuer).
  • No grace period: Cash advances do not have a grace period like regular credit card purchases. The interest accrues from the date of the transaction itself. Without substantial available credit, there is little time for repayment.
  • Transaction fees: Credit card companies usually charge a transaction fee on cash advances. This fee is either a flat amount (e.g., $5 to $10) or a percentage of the amount withdrawn. For example, if you withdraw $5,000 with a 5% transaction fee, the fee would be $250.

How Cash Advances Affect Your Financial Health

Taking out a cash advance might seem like a quick solution, but it can significantly impact your financial well-being in several ways:

  • Higher monthly bill payments: High interest rates and immediate accrual means that even a small cash advance can balloon into a large debt. As a result, your monthly bill payments can rapidly grow, especially if you’re already juggling other financial obligations.
  • Damage to your credit score: Poor management of cash advance debt will result in late payments that lower your credit score. That hurts your odds of favourable terms for a loan, mortgage, or other financial product. High utilization of your credit limit (which results from frequent cash advances) can further harm your score.
  • Debt traps: Left unattended, compounding interest and fees can cause a cash advance to spiral out of control. Many consumers cannot make the payments and leverage more debt, leading to a debt cycle.

Credit Card Cash Advance Alternatives

Before resorting to the services of a credit card cash advance, consider the following options:

  • Personal Loans: Personal loans are usually available at a lower interest rate than credit card cash advances. They can be a more economical way to borrow large amounts of money. Shop around to get competitive rates and terms.
  • Credit counselling and debt management plans: Credit counselling is a helpful support in cases of financial emergency or a struggle with existing debt. For example, you may create a debt management plan with a counsellor and consolidate all your debts into one manageable payment, usually at a lower interest rate.
  • Overdraft protection: Overdraft protection has some fees and interest, but is far less costly than cash advances.
  • Borrowing from family or friends: Loans from trusted family members or friends can work as an interest-free way out of a temporary financial problem. Be sure to discuss repayment terms clearly to avoid misunderstandings.

How to Manage Cash Advances Made Using Credit Cards

If you cannot avoid taking out a cash advance, here are some tips that will help minimize the long-term costs:

  • Borrow only what you need: Avail only an amount necessary to cover your financial emergency.
  • Repay quickly: Since interest builds from day one, pay off the cash advance as fast as possible to minimize interest payments.
  • Avoid habitual use: Resorting to cash advances frequently reflects more serious financial problems. If you use cash advances often, it’s time to look at your budget and expenditure habits to find the scope for reshaping.

How to Avoid the Debt Trap

The cash advance debt trap is better avoided by proactive financial management. Here are some strategies:

  • Budget: Make a monthly budget that accounts for your income and expenses so you live within your means.
  • Build an emergency fund: Set aside a portion of your income on a regular basis to build up a cushion of liquidity in case of emergencies.
  • Manage your debt: Pay any outstanding debts to have space in the budget for any other future financial challenges.
  • Invest in financial education: The more you know, the better your decision-making. Take some time to invest in your financial literacy.

Contact John Adamson and Associates for Debt Relief Today

While a credit card cash advance might seem like an interesting option in times of financial stress, this solution is pretty costly because of the tiring interest rates, transaction fees, and immediate interest accrual. If not well managed, it is likely to result in high monthly bill payments and, therefore, a lower credit score, probably setting up a vicious cycle of debt.

To protect your financial future, engage in healthy financial planning—high-cost borrowing methods such as credit card cash advances must be avoided. Professional help will provide appropriate solutions. A Licensed Insolvency Trustee will also be able to provide services like Bankruptcy proceedings, Consumer Proposals, and credit counselling. Adamson & Associates can help you in taking back control of your finances. Contact us today for a free consultation.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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