Tips For Avoiding a Cash Advance
Cash flow is important for all households.
Sometimes we may have an abundance of cash flowing through the home, while other times things may be decidedly leaner.
When the proverbial wolf is at the door, a cash advance may seem like the perfect solution.
They’re extremely fast and convenient, and can tide you over until your next payday comes.
However, that very convenience can make cash advances dangerous.
If you plan on living your life debt-free, cash advances should be avoided at all costs.
Here we’ll look at 5 reasons why you should always avoid as cash advance if you want your household finances to remain healthy.
We’ll also look at some more viable alternatives that will prove less damaging to your financial wellbeing.
But first, let’s make sure we’re all on the same page…
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What is a cash advance?
A cash advance is a “perk” that often comes with credit cards.
The issuers allow cardholders to withdraw cash from an ATM or directly from the bank or institution.
The amount withdrawn is then deducted from the account’s available credit balance.
Seems like a great idea, right?
It’s a quick and convenient way to get your hands on cold, hard cash at your time of greatest need.
It’s useful if you need to pay someone who won’t accept payment by cheque or card, or if you need to cover a bill or payment from your chequing account but don’t have enough in there until your next payday.
A wallet full of cold, hard cash is just a trip to the bank or ATM away.
Best of all, you don’t even need to pay off your cash advance right away.
Your advance is added to your credit card charge just like a regular purchase.
Meaning that you pay it off as part of your regular monthly instalments.
It’s easy to see why cash advances seem so convenient to so many.
But that’s exactly what credit card companies are counting on.
The more convenient cash advances are, the more we can come to rely on them.
The more we come to rely on them, the more we can find ourselves using them.
The more we use them, the more interest we pay.
So who wins?
Not you, but your creditor!
A cash advance may seem like the answer to your prayers, but the reality is that they can make your debts harder and harder to escape, burying you deeper and deeper in interest the more you use them.
Let’s take a look at 5 reasons why cash advances in Canada are best avoided…
Cash advances, unlike purchases, have no grace period
If you make a purchase on your credit card, there is usually a grace period of at least 21 days.
If you repay your debt in full within this timeframe, not only do you avoid paying a penny in interest, it goes a long way towards improving your credit rating.
The grace period is what allows the financially savvy to use credit cards to their advantage, enjoying the benefits and perks without losing money in interest.
But if you think that credit card companies will give you a grace period for a cash advance, think again!
The interest on your cash advance will begin to accumulate from the day you make your withdrawal.
Given the next two items on our list, this can mean that you quickly have to contend with some real challenges.
They come with strings (and by strings we mean fees) attached!
A cash advance is a convenience that virtually all Canadian credit card companies will expect you to pay for.
This will be somewhere between a minimum of $2-$3.50 and a maximum of $10.
That may not seem like a lot to pay, but when you combine it with the inevitable interest that will be added onto your advance, it can quickly add up.
The unfortunate truth is that these upfront “convenience fees” are pretty much unavoidable for cash advances.
There’s no clever workaround.
The only way to avoid or mitigate these fees is to try and get a card with a low interest rate that either doesn’t charge cash advance fees, or charges the minimum of $3.50.
Still, these cards are only available to those with stellar credit ratings, and even if you qualify, the amount that you can borrow may not cover your needs.
Most of the time, the convenience fee is a flat dollar amount, although this depends on your credit card provider.
Some may instead expect you to pay a percentage of your transaction.
While this tends not to exceed 1% it can add more to your outstanding balance, the more you use this service.
Meaning that more and more interest is owed.
And don’t forget that if you take the cash out from an ATM outside of the bank or credit union’s network, there will also be an ATM fee to add on to your overall expense.
While this may not be catastrophic when withdrawing a single cash advance, these sundry costs can quickly add up if you find yourself using this service regularly.
You can expect to pay more in interest
It’s also important to note that the interest charged for cash advances may not be the same as what you would expect to pay for an ordinary purchase.
This makes sense from the creditor’s point of view.
If people need cash advances, they may be more desperate and thus represent a greater degree of risk for them.
As such, most companies will charge a higher rate of interest to cover their risk and / or as a surcharge for the convenience of a cash advance.
This interest rate may be charged at 5%-8% higher than your existing rate.
So a card with an existing interest rate of 16% may go up to 24%.
That’s almost ¼ of what you borrow.
As such, you should always find out what interest rate your bank or credit card company charges for this service and think very carefully about how it will impact your repayments and the lifetime of the debt.
Cash advances can quickly become a bad habit
Ridding your household of debt requires you to be mindful of many things.
But perhaps the most pivotal of these is our habits.
Often we find that we’ve slipped into a debt hole as a result of mistakes caused by bad habits.
Unfortunately, bad habits are all-too-easy to form because access to credit has been made so convenient for us.
It’s like having a big box of chocolates open in front of you.
You may feel that there’s no harm in helping yourself to just one of these delicious morsels.
And you’d be right.
But how easy is it to just take one before putting the box away?
Even on a full stomach, it can be difficult to put the box back without having taken at least 2 or 3.
And if we’re particularly hungry, we may leave a lot more empty spaces in the box.
The exact same applies to our spending habits.
When we have easy access to quick cash, the temptation to keep using it can be difficult to resist.
But this quick fix can easily exacerbate our debt problems rather than solving them.
Escaping from debt requires us to amend bad habits and exert discipline over our finances.
But conveniences like cash advances will always give us an easy way out.
The more we rely on them, the more we have to pay off.
And as your interest rate escalates, you’ll find that even though you’re paying out more and more every month, the outstanding balance on your card barely changes.
Today’s easy money can take years of hard work and financial discipline to pay off.
They may even cause your lender to hike up your interest rates
Interest is the enemy of escaping debt.
The less of it you can wind up paying, the faster and more easily you’ll be able to pay down your debts.
As we’ve already discussed, every time you take out a cash advance, you court danger.
You risk paying off more in interest over time, at an elevated rate.
However, becoming over-reliant on cash advances can also impact on interest rates in less direct ways.
Credit card companies, and lenders of all kinds, are nothing if not risk-averse.
And if they spot any activities or behaviours that could potentially increase their risk and reduce their profits, they’ll find a way to mitigate their risk.
At your expense.
They may limit the amount you can withdraw as a cash advance or they may increase your interest rate to offset their risk.
Meaning that your debt lasts longer and becomes harder to pay off.
Viable alternatives to cash advances
The good news is that there are lots of ways in which you can get access to credit without needing to rely on a cash advance.
Or, it should go without saying, a predatory payday loan.
Here are 5 viable alternatives to a cash advance when you need to pay off an expense that you don’t have the account balance or savings to cover:
- An unsecured loan- Unlike cash advances, personal loans have a “cooling off” period. This is much like a grace period. You can cancel the loan within 14 days, after which time you will usually have 30 days to repay the outstanding balance without incurring interest. If your credit rating is not in good standing, however, you may want to consider.
- A loan from friends or family- Nobody likes having to swallow their pride and ask their friends or family for a favour. Especially when money is involved. But is your wounded pride really worth a fortune wasted on interest payments? As long as you honour the debt and do right by them as soon as you are able, a friend or family member will offer you terms infinitely more preferable to those of your credit card company.
- Ask your employer for an advance- You work hard for your employer and you’re always there for them when they need you. Maybe now they can help you out in your time of need. Ask about the possibility of an advance your next paycheque. Larger companies may have procedures set in stone to which they need to adhere. However, if you work for a small business, they may be able to offer you the flexibility you need to right your circumstances without needing to take on additional debt. They may not be able to give you a full month’s pay in advance but they may be able to cover what you need to keep expenses at bay.
- Use your credit card- Unless you absolutely need access to cash, using your credit card may be a better option. You can avoid upfront charges and excessive interest rates. Plus you’ll be able to avoid interest altogether by repaying your debt within the 21-30 day grace period.
- Get hustling- Making money is always better than borrowing it. If you have pressing expenses, maybe it’s the perfect time to start looking for items around the home that you can put on eBay, or start looking into a side hustle to supplement your income in your free time. You’ll have more money to add to your savings and thus be able to avoid relying on credit in times of need.
Need a hand getting your debts under control? We’re here to help!
Desperation combined with easy access to credit can get us deeper and deeper in debt.
But whatever the size and nature of your debts, it’s vital that you remember that there is always help and support available.
Our skilled and 100% licensed team can help you to look at all of your options and find an appropriate way to liberate yourself from debt.
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