People use credit cards to pay for purchases or bills. Most credit card balances come from purchases made directly with the card at the point of sale. However, the companies that issue credit cards eventually realize that many people need financial resources to pay for expenses where credit card systems aren’t available.
Cash advances on credit cards are more common than they used to be, especially given that many credit card providers didn’t always offer cash advances. If you need to pay your rent or another bill, having a quick and accessible source of cash can seem beneficial. Unfortunately, taking advances against your credit card can be a disastrous financial decision.
Cash advances often come with higher interest rates
If you look at the fine print for your credit card, you will likely find that the company charges a higher interest rate for cash advances than it does for standard purchases. You will pay a lot of interest on that advance unless you pay it off in full by the time your next statement comes due.
That interest will probably start accruing the same day you take the advance. You may also have to pay a fee for the cash advance, possibly as high as 5% of the amount you withdraw.
Relying on cash advances could be an early warning of financial hardship
Needing to defer or delay payment for a tank of gas or a week’s worth of groceries could just mean that you had some unexpected expenses or a minor drop in income recently. Needing to borrow your mortgage premium or rent payment from your credit card more than once could be a sign that your budget isn’t sustainable.
Those who take cash advances have substantially higher risk of defaulting on their balance. After all, they may have ever-growing levels of debt and household expenses that they can’t pay with their current income.
If you are at a point where cash advances seemed like the only way to make your finances work, what you may need to do is to get rid of some of your credit card debt through a bankruptcy discharge so that more of your income goes directly to your current expenses, rather than old bills you couldn’t pay.