A cash advance on your credit card works in the same way as a payday loan, but the terms are far more onerous. It is because they are loans with high interest rates that can be taken out up to your credit limit, that they pose a significant threat to consumers who do not exercise proper caution when using them.
Instead of using your credit card to get a short-term loan, it is strongly recommended that you go through a bank or a private lender.
In this article, we will discuss the top reasons why cash advances on your credit card can be a financial trap.
Why Cash Advances on Your Credit Card Can Be a Financial Trap?
Cash advances on your credit card are high-interest loans
Cash advances on your credit card are high-interest loans. The interest rate for cash advances is typically higher than the regular purchase APR and can range from 10% to 30%.
Cash advance fees vary by credit card issuer and can cost anywhere from $10 to $30 or more.
If you take out a cash advance on your credit card, make sure you understand how much it will cost you in interest charges and fees over time.
In addition to paying off the amount borrowed plus any fees charged by both parties (you and the lender), any unpaid balance will be subject to interest until paid in full at either an introductory rate or standard annual percentage rate (APR).
Read Also: Why Do Young Singaporeans Have Credit Card Debt?
Your credit card’s cash advance limit will be lower than its credit limit.
In addition to the lower limit, cash advances are more expensive than regular purchases. The interest rate for credit cards is typically about 20% higher for cash advances than it is for regular purchases.
This means that if you take out $100 as a cash advance, it will cost you $120 (the amount plus interest) over time if you don’t pay off your balance before the grace period ends.
Cash advances on your credit card count against your credit utilisation ratio.
The percentage of your total available credit that is being used is referred to as your credit utilisation ratio. It is one of the criteria that goes into determining your credit score and can be an indicator of whether or not you use your credit cards in a responsible manner.
Keeping track of your credit scores is essential if you want to get a good deal on the many financing options available to you because they are crucial because they assist lenders in deciding whether or not they should approve you for loans or credit cards.
Cash advances on a credit card count against your overall debt, making too many cash advances could reduce the amount of money left over for further purchases and put a greater burden on current balances, both of which damage your credit score. In addition, your credit score is affected when you make too many cash advances.
Cash advances can affect your credit score
Cash advances can affect your credit score. A credit report is a collection of personal information about you that’s maintained by one or more credit reporting agencies.
Credit scores are calculated using the data in your credit reports and are used by lenders to decide whether they’ll lend money to someone like you based on their risk assessment of that person’s ability and willingness to repay debts over time.
When you take out a cash advance on your credit card, it shows up as an increase in available balance on the account statement–but not all lenders see this change when they look at your report with them (especially if it’s an increase from $1 to $2).
If there isn’t enough information for them to calculate where exactly things stand with regard to how much available balance versus outstanding balance there is at any given moment in time, then some lenders may simply ignore this information altogether when calculating scores; others may use only partial data points rather than full ones; still others might treat all increases equally regardless of their source.
Cash advances are usually a bad idea anyway, even when you need the money
The problem with cash advances is they are expensive. While you may be able to get a higher APR than you could on a regular credit card purchase, there are still fees associated with using your credit card as a source of emergency funds.
Not only do you have to pay interest on the cash advance amount itself, but if it’s not repaid within six months or so (depending on what type of card you have), then there will be additional fees added onto the principal balance charged at an annual percentage rate that could range from 24% all the way up to 30%.
This can make paying off even just one small $300 cash advance feel like climbing
If you’re going to do a small personal loan, do it from a bank or a licensed lender, not your credit card provider!
If you’re going to do a small personal loan, do it from an actual bank, not your credit card provider!
Credit cards are not designed for lending money. Cash advances on credit cards are expensive and can be a trap that keeps people in debt.
If you need cash right away, consider other options such as applying for a personal loan with a licensed money lender or borrowing from friends and family members instead of taking out a cash advance on your credit card (which will cost much more).
Read Also: 10 Smart Ways To Use A Personal Loan
The Bottom Line
If you’re going to do a small loan, do it from an actual bank or a licensed moneylender, not your credit card provider! If you have good credit, it can be much cheaper than using your credit card as a cash advance.
And if you don’t have good credit? Well then maybe it’s time for some serious introspection about how and why that happened in the first place.
Read Also: Can You Get a Personal Loan in Singapore with a Bad Credit Score?
