5 Reasons Why You Should Avoid a Cash Advance

Understanding Cash Advances: Why You Should Think Twice

We’ve all been there: strapped for cash and looking for a quick solution. Cash advances on your credit card might seem like an easy way out, but the convenience comes with a price. Here are five reasons why avoiding a cash advance might be in your best interest.

What’s in a Cash Advance?

A cash advance service, provided by your credit card issuer, lets you withdraw cash from your available credit card balance. Whether at an ATM or a financial institution, it’s a quick and convenient way to get cash when credit cards aren’t accepted or your bank account falls short. But as convenient as it seems, there are certain financial implications that you should be aware of before opting for a cash advance in any country, including Canada.

The Hidden Costs of Cash Advances

1. Upfront Cash Advance Fees

A cash advance on your credit card usually comes with a fee upfront. The calculation of this convenience fee varies by credit card provider. You might be charged a percentage of your transaction (often around 1%) or a flat dollar amount (typically $2 or $3.50). If you’re using an ATM outside of your bank or credit union’s network, remember that you’ll likely also have to pay an ATM fee on top of the cash advance fee.

2. Higher Interest Rates

Contrary to popular belief, cash advances aren’t treated the same way as everyday purchases. In addition to the service fee, you’ll also be charged a higher interest rate. The reason? Cash advances are a convenience service that many are willing to pay more for, and their use can potentially reflect a higher financial risk for the credit card company.

The interest for cash advances can be 5% to 8% higher than the normal rate for purchases. So, if your credit card purchases attract a 16% interest rate, your cash advance could attract up to a 24% rate. That’s quite a hefty charge for borrowing money, so it’s worth reconsidering your options before resorting to a cash advance.

3. No Grace Period

Unlike credit card purchases, most cash advances don’t come with a grace period. Interest starts accruing the same day you withdraw the money. For instance, if you take out an $800 cash advance with a 1% fee and a 24% interest rate and pay it back in 10 days, you’ll be charged $13.26 (an $8 fee plus $5.26 in interest) for borrowing the money. That’s equivalent to a staggering 60% annual interest rate!

The Domino Effect of Cash Advances

While the fees associated with cash advances are certainly high, they’re not the only concern. Cash advances can set off a chain of financial troubles that can spiral out of control if not managed properly.

4. Encourages Harmful Financial Habits

Cash advances can facilitate harmful financial behaviours and exacerbate underlying financial issues. Relying on cash advances to meet regular expenses like rent can lead to a vicious cycle of high-interest borrowing, which can be challenging to break free from.

5. Potential for Higher Credit Card Interest Rates

Frequent use of cash advances can signal financial difficulties to credit card companies, which can lead to them either reducing your cash advance limit or increasing your card’s interest rate to offset the perceived risk.

Alternatives to Cash Advances

If you need cash urgently, there are alternatives to cash advances that may be more financially sensible.

1. Use Your Credit Card

Instead of taking a cash advance, consider putting your bill or purchase on your credit card. This way, you avoid the upfront fee, pay a lower interest rate, and get a one-month grace period to pay back the balance interest-free.

2. Personal Loans

If credit cards aren’t an option, consider taking a personal loan from a bank or credit union. Though this route requires good credit, it can offer a reasonable interest rate.

3. Borrow from Friends and Family

Swallow your pride and ask someone you trust for a cash loan. Be aware, though, that money can affect relationships, so ensure you can repay the loan promptly.

4. Paycheque Advance

If you have a good relationship with your employer, they might be able to give you an advance on your next paycheque.

5. Generate Extra Cash

Consider selling some of your belongings on online platforms, getting a second job, or renting out a room in your home to generate extra cash.

Making an Informed Decision

If you’ve considered all options and believe a cash advance is still your best bet, be sure you’re clear on the interest rate and potential fees. Only withdraw the amount you need, and ensure the card you’re using has a low balance. Remember, interest starts accruing the moment you withdraw the money, so it’s best to pay it back as soon as possible.

Final Thoughts on Cash Advances

Cash advances might be necessary in some cases, but they should only be used in emergencies and not regularly. If you’re relying on them for daily expenses, it’s time to reassess your finances. The best way to avoid a cash advance is to plan, budget, reduce expenses, increase income if possible, and start an emergency fund. This way, you’ll have a safety net for future financial emergencies and avoid the high costs associated with cash advances.

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