There are many different ways that a credit card can help someone who is experiencing financial challenges. The flexibility of having a credit card ensures that people can cover unexpected expenses as they accrue. Unfortunately, the flexibility of credit card use can lead to financial strain relatively quickly.
People can secure cash by taking an advance from their credit card to cover expenses that they cannot pay with the credit card directly, like rent and mortgages. Contrary to what people may expect, cash advances from credit cards often lead to worsening financial circumstances rather than an improvement in someone’s situation.
Why cash advances can be dangerous
Getting cash back when using a debit card is vastly different than getting cash back when paying with a credit card. First and foremost, there is the possibility of a fee. Some credit card companies charge a flat fee for cash advances. That fee is likely higher than the charge to use an ATM when taking cash out through a debit card attached to a checking account.
More importantly, there’s the interest that may accrue. Credit card companies offer variable interest rates in different situations. It is common for a cash advance to have a higher interest rate than a standard purchase made using the same credit card. Even if the interest rate is the same for cash advances as for purchases, that rate is likely in the double digits and can easily be more than 20%.
Particularly when people request large cash advances to cover their rent or mortgages, the cost involved can be substantial. Borrowers may soon find themselves at the limits of their lines of credit and at risk of over-limit fees in addition to the constant interest applied to the account.
A one-time cash advance to address an unexpected financial challenge isn’t inherently a dangerous choice. However, repeated cash advances and those that people cannot repay within the same billing cycle can set someone up for financial hardship.
Instead of moving money from one account to another, which is often what transpires in scenarios involving cash advances to cover cost-of-living expenses, eliminating some obligations can be a more permanent solution. The decision to file for personal bankruptcy is not one to make lightly.
If people find themselves relying on cash advances and other high-cost financial tools, reducing their credit card debt and halting collection activity might be in their best interests. Learning more about personal bankruptcy can potentially make a world of difference.