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While cash advance credit cards allow you to use part of your credit line to withdraw cash, there are a number of fees and fine print issues that must be considered before proceeding with a cash advance. Getting a cash advance from your credit card is relatively easy. However, one must be aware of the expenses associated with taking a cash advance before inserting their credit card into an ATM. In the past, some credit card companies offered 0% APR cash advances. Today, no credit card company offers these deals. Interest rates and fees on cash advances are extremely high. And there are plenty of other costs you should be aware of.
The first issue with cash advances is the fee. Most credit card companies charge a minimum fee of $5 to $10 or 3 to 5%. You are charged the greater of the two fees. With a $10 minimum fee, you pay 10% on a $100 cash advance. The larger the advance, the lower the percent of the fee. Nevertheless, taking a $500 cash advance will likely cost you $20-$25 right off the bat.
Paying a $25 cash advance fee may not seem like much, especially if you are in desperate need of cash. However, this fee is the least of your worries. Unlike other credit card transactions that have a grace period, cash advances begin accruing interest immediately. The very second you get your hands on cash, interest starts accumulating. With cash advance interest rates typically ranging from 22% to 29%, this can add up quickly.
Okay, so you really need cash and don't care about the cash advance fee or the interest rate. Well, here's another problem that can massively increase the time it takes to pay back a cash advance: your entire minimum monthly payment will be used to reduce whatever balance on your card has the lowest interest rate. Essentially, this means that if you have $1,000 at a 14% rate and $1,000 at a 29.99% cash advance interest rate, your minimum payment will only reduce the balance with the 14% rate. What you pay above the minimum will reduce the cash advance balance, but if you only pay the minimum, you could literally be in debt for life. (If you don't believe me, plug in a 29.99% interest rate into the Federal Reserve's Minimum Payment Calculator-it will tell you the same.)
Because of the way credit card companies use minimum payments to reduce lower interest balances on your credit cards, if you must do a cash advance, do it on a card with no current debt on it or find a new 0% credit card offer. Sure, you won't be able to get a 0% APR cash advance, but at least you stand a better chance of paying it off.
Lastly, and I do apologize for preaching, do everything you can to avoid taking a cash advance. For example, charge items you might otherwise pay for with cash. Or see if you can find a friend or family member and use your credit card to purchase something for them in exchange for cash.
I realize that these options aren't always realistic. Nevertheless, cash advances are by far the most expensive credit card transactions. Not only do they come with massive fees and extortionate interest rates, but they could theoretically keep you in debt for life.
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