How to reduce the costs of a cash advance

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If you already have a credit card, it’s easy to get a cash advance.

But it can also be very expensive. Before you borrow money from your credit card, make sure you understand how a cash advance works, how you can minimize cash advance fees, and if there are better alternatives.

How do cash advances work?

A cash advance is a way to borrow cash from your credit card company. You can start your cash advance online, through cash advance checks sent with your credit card statement, or through an ATM.

To withdraw money from an ATM through a cash advance, you will need the PIN number associated with your credit card. You will then have to agree to all cash advance fees before you can get your money. You may also incur ATM fees.

If you initiate your cash advance online, you can set it up to be deposited directly into your checking account via ACH transfer. You will have to agree to all cash advance fees before receiving your money this way as well.

Another way to get a cash advance is with convenience checks that your credit card issuer sends with your account statements. These can come with every statement, every few months, or once a year at renewal, depending on your credit card issuer. As soon as you sign and return the check, you agree to the terms of the cash advance.

Your cash advance limit is likely to be less than your credit card purchase limit. Check your documentation or contact your card issuer to find out your credit limit for a cash advance.

What makes credit card cash advances so expensive?

Cash advances are an extremely expensive way to borrow, even more expensive than using your credit card to make a purchase. Cash advances come with additional transaction fees and higher APRs than regular credit card purchases. And that APR starts accruing immediately unlike credit card purchases.

transaction fees

The first expense to consider is the transaction fee. This fee usually ranges between 3% and 5%. There is usually a minimum fee of around $10.

Let’s say you got a $250 credit card cash advance with a 3% transaction fee, but a minimum transaction fee of $10. Three percent of $250 is $7.50, but that’s less than the minimum transaction fee. . Therefore, you will be charged a transaction fee of $10, even though it is more than 3%.

But if you’re taking out a $1,500 cash advance, 3% would be $45. Since 3% is more than the minimum transaction fee of $10, you would pay $45 in transaction fees.

high APR

Credit cards almost always come with a high APR. But each card actually comes with at least two APRS: one for purchases and then one for cash advances. The cash advance APR is almost always higher.

This is true even if you sign up for a card with a 0% introductory APR. This 0% rate typically applies for a set period, say 12 months, and typically only applies to credit card purchases or balance transfers. Generally, it does not apply to the APR for cash advances.

Interest begins to accrue immediately

Credit card cash advances not only come with a higher APR, but the interest starts accruing right away. With credit card purchases, you’ll get a grace period and pay no interest if you pay off your balance in full before the due date on the first statement after purchase.

Not so with cash advances. There is no grace period. You start owing interest the moment the money leaves the ATM (or is transferred to your bank account). Because interest starts accruing right away, it becomes much more expensive to pay off much faster.

What is the average cost of a cash advance?

The cost of your credit card cash advance varies depending on the amount you borrow. To simplify this analysis, let’s assume you are borrowing $1,000. The average cash advance fees and interest rates on a cash advance are:

  • 3% to 5% transaction fee
  • 24.99% APR

With a balance of $1,000, your transaction fee can range from $30 to $50. With an APR of 24.99%, if you paid off your balance on the 30th, you’d owe about $20.83 in interest. If it only took a month to pay it back, the total financing costs would be between $50.83 and $70.83.

The longer you take to pay off the debt, the more expensive it becomes. Credit card interest is generally compounded daily. This means that what seems like a manageable dollar amount of interest at first can quickly spiral out of control.

How to reduce the costs of a cash advance

A credit card cash advance is an expensive way to borrow and should be avoided if possible. But if you find yourself in a situation where you absolutely need one, there are a couple of ways to stop the bleeding. They are simple concepts, but may not be easy to implement.

Minimize how much you borrow

The fees and interest on your cash advance are a percentage of the amount you borrow. That means one of the best ways to limit your interest and fees is to lower the amount you borrow.

If you are borrowing this money to pay a down payment on a car loan so that you have transportation to your place of work, you may not get the fanciest model of vehicle. Get something functional, safe, and affordable instead, without all the bells and whistles.

You can also try to negotiate with the dealer on a base price, which should reduce the amount required for a down payment from the bank.

It’s worth considering anything you can do to reduce the amount you borrow through a credit card cash advance.

Pay off your cash advance as quickly as possible

Just trying to scrape together enough money to buy groceries until payday? Then be sure to pay your cash advance as soon as your paycheck arrives in your account.

Because interest accrues daily, each day you owe money will cause your total due to increase dramatically the longer it takes to pay it off.

Alternatives to cash advances

If you need money fast, there are other products you could consider. Some are better than credit card cash advances, and some are worse.

Personal loan vs cash advance

Personal loans They tend to be cheaper than cash advances if you have good credit. Unsecured personal loans don’t require collateral, and you should ideally get one with a fixed interest rate for predictable monthly payments.

if you have good to excellent creditYou can expect these loans to come with a APR somewhere between 7% and 20%. However, if you have bad credit, the interest rates could be even higher than those found on cash advances.

Personal loans sometimes also come with origination fees, which are an additional fee but are also factored into the cost of the APR. If you take one of these loans, it’s ideal to find one with no prepayment penalties. That way, if you pay off the loan early to save money on interest, you won’t incur additional costs.

Also beware of personal loans that come with balloon payments. With these loans, your monthly payment will be lower at the beginning, but then you will have a lump sum payment at the end. If you can’t afford the balloon payment, you’re back where you started: you need to borrow more money.

One drawback to these loans is that they tend to have terms that last at least a year, although you can find some with shorter terms. Another problem is that if you only need to borrow a few hundred dollars, most financial institutions offer a minimum amount between $500 and $1,000. So you could end up borrowing more than you need.

In many cases, a personal loan is preferable to a cash advance. But keep in mind that if you have bad credit or the interest rate you’re being offered is higher than 20%, that might not be the case. Run your own personal numbers carefully.

Payday Loan vs. Cash Advance

The interest rate advertised by payday loan lenders is rarely in terms of APR. If it were, it would often be greater than 100%.

Different states have different laws that regulate exactly how much payday lenders can charge, but a cash advance will still be much cheaper than a payday loan.

Borrowing money from family and friends vs. cash advance

If you find yourself in a difficult financial situation, you can always ask a family member or friend for help. Depending on their relationship and the amount of money, they may hold the debt informally or write an official contract with or without interest.

Before you borrow money from family or friends, make sure you can repay them in the near future. If you can’t, you can damage your relationship. However, if you can find a favorable and realistic deal, this method will most likely be less expensive than taking out a cash advance.

Request Assistance vs. Cash advance

Take out a cash advance to cover something like a utility bill? There may be a program available to help you avoid having to borrow from your credit card company.

For utility bills in particular, there are generally two options: payment plans or charity assistance programs.

If your utility company sets you up with a payment plan, they may be willing to spread out your current balance over several months, making payment more feasible than owing it all in one lump sum. They can also set up a plan that calculates equal payments over the course of a year, so you don’t pay $20 for heat in July and $300 in January. Instead, you might get a more consistent monthly bill of $150 or so.

If there is a state, government, or charitable program associated with your utility company, they may have funds available to help people experiencing financial hardship. It may hurt your ego to apply for a program like this, but the amount of interest Y The principal you save can give you a clean slate and help you keep the lights on without running up unaffordable debt.

Pittsburgh-based writer Brynne Conroy is the founder of the Femme Frugality blog and author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.


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