4 key questions to ask when considering a cash advance

4 key questions to ask when considering a cash advanceA credit card cash advance is like grocery shopping at a convenience store: handy but expensive.   

Financial experts say that except in the most dire of emergencies, cash advances are a bad financial idea.

"That's your highest-risk money, when someone's using their credit card as an ATM," says Mark Berg, president of Timothy Financial Counsel, a Wheaton, Illinois, financial planning firm.

4 questions to ask before getting a cash advance

Experts say to ask yourself four questions before getting a cash advance:

  • Can I pay the money back in a month? That's the only way to minimize their high interest rates.
  • Is there any other way to deal with this financial situation? Consider all options -- even borrowing money from a family member, Jones advises. The only worse place is a payday loan company.
  • Do I really need what I'm about to buy? Impulse buying is a habit more than anything. Need a car battery on a winter day, and the dealer won't take a credit card and you forgot your ATM card? Go ahead. A pair of Jimmy Choo shoes? That new iPhone? Think again.
  • Do I need help? The typical cash advance customer is a cash-crunched customer in need of a financial makeover. Consider making lifestyle changes.  

How do cash advances work?

Advances are loans from your credit card issuer, easily available in two ways: via an ATM or by cashing a convenience check. But you pay for that convenience with high fees and compounded interest rates that soar high into the double digits.

While some offers come with low introductory, or "teaser" rates, they can seduce consumers into a false sense of security, adds Heidi Albert, president of School2Life.com, a Chicago-based company that teaches money-management skills to young adults.

"They say, 'They wouldn't have given me the money if they thought I couldn't pay it back,'" she says.

Expensive, unpopular

Cash advances are not that widely used. According to a 2015 Federal Reserve report, only 11 percent of Americans report having taken out a credit card cash advance in the previous year.

With good reason: They've very expensive.

According to CreditCards.com research:

  • The average cash advance interest rate is 23.68 percent, nearly 8 percentage points higher than the national average rate charged on consumer credit cards.
  • Cash advances come with high fees. The most typical fee is 5 percent of the amount withdrawn, or $10, whichever is greater. That's on top of any interest rate charged.
  • Worse, with a cash advance, interest is charged from the moment the cash is withdrawn. Consumers who take out cash advances give up their grace period -- the period during which, on ordinary purchases, consumers can use their credit cards without incurring any interest charges, as long as they don't carry balances.

For more data about cash advances, see Cash Advance Survey 2017: Read the fine print before seeking quick cash.

Not always a bad choice

As unwise as cash advances are, financial advisers say there are times when they might be an acceptable financial choice.

One is when you're looking for a very short-term loan.

J. David Lewis, a financial planner who lives in Knoxville, Tennessee, plans to use a cash advance from his Mastercard to buy a used video camera for his 26-year-old son, a professional photographer who doesn't have a credit card.

His son plans to buy the camera from an individual, not a store, and needs to use cash. Without his own credit card, the son has few options. "The market doesn't have a lender for that, and if it does, you wouldn't want to cross their door," Lewis says. His son will write the monthly checks to the credit card issuer to repay the loan, a strategy Lewis hopes will introduce his son to the habit of borrowing money and repaying it in a timely fashion.

Lewis has done the math: Using a promotional deal on his Mastercard, the $2,000 cash advance will cost $2,114.74. That's the amount of the advance, an $80 fee and a month's worth of interest at 4.99 percent. He says the interest and fee will be reasonable -- that is, if his son pays the loan back within a month. Lewis is keeping his fingers crossed. "Cash advances work if you have the discipline to pay it off. If you don't, the penalties are pretty high," he says.

A dire emergency -- say your car has broken down, the mechanic will only take cash and you don't have your ATM card in your wallet -- can also make a cash advance an acceptable alternative.

Even then, think twice,  "It ought to be a last resort." Berg, with the Timothy Financial Counsel, agrees, saying he'd rather see clients who need money sell a few belongings than get a cash advance.

Indeed, too many dips into the cash-advance waters should spark a drastic lifestyle change, says Berg. "Think of what you can't live without, wait a month and see if you're still alive," he says. "Cash advances go against the core philosophy of living within your means." 

 

See related: How cash-advance convenience checks work


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Updated: 06-23-2018