Cash Advances
Cash advances are always tempting, and come in a variety of forms. You may notice that your credit card company sends you a sheet of blank checks periodically. They encourage you to use these checks as a cash advance. You can use the money absolutely any way you want. You can transfer balances, you can make a deposit to your checking account, or you can buy an item that you've had your eye on.
Another version of cash advances is the ATM cash withdrawal. Instead of using your debit card to get cash, you can use a credit card. Of course, that means you can borrow to get the cash if you don't have it available. As with the preprinted checks, you can use this money any way you want. Cash advances are powerful and they can add a lot of convenience, but they're generally a bad idea.
Cash Advances Versus Other Loans
When you think about it, a cash advance should be just like any other loan. However, credit card companies and finance companies treat cash advances differently. They fall into a separate category from purchases and balance transfers. That separate category typically has a higher interest rate than any of the other categories.
Why would they charge you more interest on cash advances? As we discussed, you get a lot of flexibility by taking cash advances. One of the reasons they charge more is that flexibility usually costs money. Next, cash advances might not work the same for credit card companies. Take the example of the sheet of checks you get: the credit card company has to print and mail you the checks, as well as process the check differently. It's a piece of paper, not an electronic request like most credit card purchases. Finally, credit card companies may not earn any transaction fees on cash advances. It is a different beast, so they charge differently.
When you use cash advances, you can get yourself into trouble. Often, you'll have a nice credit card with a very competitive rate on purchases or balance transfers. When you read the fine print, you'll find that cash advances have a much higher rate. Furthermore, the credit card company can apply your payments to whichever category they choose: purchases, balance transfers, or cash advances. If you make a payment, typically you'll find that the credit card company pays down the category with the lowest interest rate, which usually isn't the cash-advance category. You have to pay off everything else on your card before you can start chipping away at the cash advance you took long ago.
Alternatives to Cash Advances
As a general rule, you should avoid spending beyond your means, especially when it comes to smaller items or items with a short lifespan. However, there may be times when cash flow is tight and you'll need to free up some money. In particular, you sometimes have situations where you can't charge something, but you really need to pay for it. Instead of using cash advances, you might just get creative and try to get those dollars from somewhere else. There are no good ways to do this, but here are some ideas to make the best of a bad situation.
You might think you're taking a short-term loan when you use a cash advance. Being the responsible person that you are, you figure you'll pay the money back quickly, because it's got a higher interest rate. However, you usually have to pay off all other balances with a lender before they will start putting your payments toward the cash advance.
If you have no choice but to borrow, at least make the most of it. If you put a cash advance on top of other credit card debt, you'll get eaten alive unless you can pay everything off quickly. You might consider using a different lender for a cash advance. Perhaps you have another credit card, or an offer for a cash advance. Then, pay off the cash advance quickly and get back to work on any other debt.
Another way to free up some cash is to charge everything and hoard your cash. This strategy takes some preparation and planning. If you've got income, you change your spending method to keep the income. Charge everything possible that you would normally pay cash for, and use the cash you accumulate for whatever your needs are. Note that this is a very risky approach, and it is only appropriate for a short-term situation with light at the end of the tunnel. Even with the best intentions, you might find those debts you racked up on your credit card statement years down the road.
Don't count your chickens before they hatch. If you work out an arrangement with your creditors, get it in writing. After you've settled the debt, get more written documentation that the debt has been settled as agreed, and that you don't owe them anything more. Then you can breathe easy. Keep copies of these letters forever.
The worst type of cash advance is a payday loan or paycheck cash advance. These businesses loan you money for short periods of time. Unfortunately, the interest rates are extremely high — several thousand percent per year is what you might expect. If you ever use one of these loans, do not make a habit out of it. As with debt-consolidation programs, you need to identify whether or not you are living beyond your means. If you are, cash advances will not help you, they'll only get you in a deeper hole.
