Chapter 2: Credit Cards – An Owner’s Manual
Credit Card Cash Advances
Let’s make this one super simple.
Just say “No!” to cash advances.
Seriously. Think of cash advances as The Nuclear Option. Better yet, don’t think of cash advances at all. Forget you ever heard of them.
Why? [I hope you’re all asking why.]
Well, I’m so glad you asked. Let me tell you why using the cash advance option on your credit card is the nuclear option. The toxic option. The non-optional option.
A cash advance on your credit card is not dissimilar to getting a payday loan. It’s a very expensive way to borrow money. Did you catch the very expensive part?
Here’s how they work:
- You use your card to get a cash advance — at your bank or an ATM.
- You pay a hefty Cash Advance fee (check your credit card’s fine print).
- Next comes the interest charged on cash advances. And there are four important issues to understand about interest on a cash advance:
- it starts immediately (the day you receive the advance);
- the interest rate is exceptionally high;
- the interest rate is variable, not fixed (it can increase);
- the interest compounds daily.
Let’s plug in some numbers and see that in a real-world example:
My CapitalOne Quicksilver card charges a fee of either $10 or 3% — whichever is higher. Sounds fairly harmless, right? Wrong. If I were to take a cash advance on that card, any amount up to $333 would cost me the lowest possible fee: $10. Anything above that and my fee gets higher.
My CapitalOne card has a cash advance limit of $5,000. If I were to borrow that entire amount, the fee alone would be $150. Now let’s add in some interest. My standard APR on this card is 18.9% but the interest rate on cash advances is 25.9% APR. Compounded daily beginning the day I take the cash advance.
Final total for a 30-day cash advance of $5,000? $5,260.77
In other words, it would cost me $260.77 to borrow $5,000 for 30 days.
And those are the costs I’d incur on in a best-case scenario. With cash advances, there are no grace periods for repayment — if my entire payment is not made by the Due Date (that’s the advance plus the fee plus the interest), then I get hit with additional fees. Plus compounding interest continues to pile up.
To be fair, these rates are better than I’d get from a payday loan outfit. I can’t speak from experience but I’d guess CapitalOne’s terms are also better than I’d get from a loan shark. Still, that’s a hefty price to pay for a short-term loan.
One more interesting tidbit about cash advances. . . . Certain transactions count as cash advances: purchasing lotto tickets or gambling chips at a casino, for example. Be sure you understand your credit card’s fine print before you gamble with The Banker’s money!
There’s an interesting exception in the other direction: Discover cardholders have the option to get “cash back” when making purchases and Discover does not treat these cashback amounts as cash advances. Instead, they are treated the same as all other Discover card transactions. The transaction details are logged in The Banker’s notebook, no special fees are added, and no interest is charged if your monthly statement is paid in full by the due date. So, if I go to the grocery store and spend $4.00 on two pounds of Honeycrisp apples and, during the checkout process, I can tap on the button to get $20.00 cash back with my purchase. I’ll get two $10’s to put in my wallet and while I’m putting them away the Discover Banker is writing “Elizabeth Harden, King Soopers, $24.00” in this little tally book.
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