Using your card for fast cash is costly

Dear Opening Credits,
Is there a credit card that will advance money at the ATM ? — Wayne 

Dear Wayne,

Most credit card issuers allow cardholders to take a cash advance on their account. If yours does (and you have the means to pay it back and you know your card’s PIN number), you can withdraw the money from just about any automated teller machine. Other ways to do so include going into a bank and conducting that business with the teller, or cashing the checks for legal tender that some card issuers send their customers.

But should you? In most cases I recommend against them. Here are three reasons why I say use extreme caution and prudence when using a line of credit as a loan.

1. A cash advance fee is added to the loan. The best way to use credit cards is to make purchases. When you charge, whatever you spend is the amount that you borrow. For example, if you were to buy a $1,000 television with your card and pay off the entire purchase price within the grace period (typically 30 days), there would be no additional fees to pay. However, if you were to take the cash out instead, you’d immediately be assessed a fee of between 2 percent and 4 percent of the advance. That means that if you bought that same TV with the money from your account, it could cost you $40 more right off the bat.
2. Interest is assessed immediately. Unlike with purchases where you have about a month to pay in full before interest is added to a balance, there is no such grace period with cash advances. Finance charges kick in the moment you extract the money. Oh, and remember that origination fee that was assessed? Interest is charged on that, too.
3. The APR may be quite high. Think you have a good interest rate? Better check what it is for cash advances. Many credit card companies charge a higher rate for cash advances than for purchases. The rationale is that credit cards are really meant to be used as payment tools, not loans. So if you do use your card this way, you’ll pay a premium for the privilege.

Now, I’m not implying that there aren’t times when a cash advance makes sense. In the rare emergency, it can be a worthwhile convenience. Maybe your car breaks down in the middle of nowhere, and the garage only (and inexplicably) accepts cash. If you don’t have that much cash on hand, borrowing from your card can help you avoid sleeping in the front seat until help arrives. As long as you have enough of a credit line remaining in the account, you’d have instant access to the funds.

If you do choose to take money from your credit card account, it is very important that you delete the balance quickly. Make a repayment plan that stretches your comfort level. If you don’t and let the debt linger, you may find that the cash you withdrew becomes as much of a problem as the initial crisis.

See related:4 key questions to ask when considering a cash advance