We have all done this without realizing the financial repercussions of our actions. But, unless you know how using your credit cards cash advance option can cripple your credit, you may be making the same mistakes over and over.
Its so easy to do. You and your friends are going out on the town and you didnt make it to the bank before it closed. But you need cash! So, you head to the nearest ATM and set in motion events that you may be dealing with for a long time.
But heres the rub. From the moment that the ATM spits out your cash, the interest on that withdrawal begins to accrue and before you know it, the initial $100 has ballooned into a much larger sum.
Why Credit Card Companies Love Cash Advances
These outfits are in business for the same reason that other companies are in business: to make money. Credit card companies love cash advances because they are much richer streams of revenue for them.
Right off the bat, unless your withdrawal comes from an ATM owned by your bank, you get dinged by a processing fee, (or some similar usurious euphemism) and that fee gets slapped onto the amount that was withdrawn. Then, in most cases, there is no grace period on cash advances, which means that interest on your withdrawal begins ticking immediately, which of course also adds to the tab.
Heres the real kicker. Most often, cash advances are charged at a much higher rate of interest than your regular interest rate, which further adds to the balance. An average credit card interest rate is around 18%, but the rates on cash advances generally begin at 25%, and can be 30% or higher!
But wait, theres more! Because of the way that credit card companies typically structure the terms of payment, if you have a balance in addition to the cash advance charges, any payments made will be applied to the other charges before a penny is paid against your cash advance. This means that they are using every opportunity that you give them to make as much money as possible from your decisions.
The awful truth of it is that we willfully do this to ourselves every time we hit an ATM for quick cash. The credit card companies cannot be viewed as villains, because all of these conditions are in the agreement that we sign when we get the card. All of these fees may be difficult to find in the fine print, but this information is required by law to be there. We just never think about how much it costs us until the statement comes.
But How Does This Cripple my Credit?
Cash advances can cripple your credit only if you cannot pay the balance in full the following month, and/or you are late with a payment.
If you make the mistake of being late, then things get really ugly. The following events are then set in motion:
Interest Rate Hikes
The moment that your payment is late, the rates at which your cash advance and other balances are charged gets boosted considerably. Five percentage points may not seem like a big deal initially, but if your balance is $1000 or above, it can become a much bigger problem to pay off your debt.
Being late also opens the door for all sorts of additional charges to be made against your account. These fees get added to your balance, and then interest can be applied to that as well.
Huge Impact on Your Credit Rating
On average, 35% of your credit rating is based on timely payment of borrowed money. This figure alone is the single biggest part of your credit score, and if you are late with a payment, it will take a disproportionately long time to overcome that one mistake.
There is nothing wrong with using the cash advance option on your credit card if you are in a tight spot and need cash right now. Just make sure that you will be able to pay off the full amount when your next bill comes, so that you can avoid all of the pitfalls that can follow.
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