Personally, I always forget or misplace my credit cards’ PIN numbers anyway, so I think I’ve only done one cash advance in my life from an actual ATM terminal. I have, however, done a few through online banking by simply transferring money over from my VISA into my checking account. My conclusion is: don’t – get overdraft protection instead and use an emergency savings fund!
Judging from the responses my last article got on how to properly use your credit cards (it went to Tip’d and got more reactions there, including that its suggestions were “silly” and “superfluous” for rational customers. Too bad we aren’t all rational customers.), it appears that some of my views might be contrarian… but I’ll let you be the judge. When is it a ever a good idea to use your credit card to take out a cash advance? Well, considering how dangerous credit cards can be if you’re not in control of paying them off in full each month (or at least paying off most of it each month), or if you’re knowingly using them when you know you will have no means of easily paying that money back – cash advances can put you in an even trickier situation because they usually cost significantly more in terms of the interest you have to pay on them.
Of course there are a range of situations in which it might be a good idea to take out a credit card cash advance, or similar types of cash advances such as payday loans and loans from peer-to-peer lenders.
(1) emergencies – genuine medical, family-related emergencies and emergencies while traveling come to mind.
(2) education – if the only way you can pay the rest of your tuition or get books you need for your course is to do this otherwise you can’t register; just make sure your student loan or other paycheck is truly coming right around the corner so that you can pay it back off asap.
(3) getting a new job – similar to #2, if you’re currently unemployed and you need to borrow in order to get a new suit, make a flight for an interview, etc.
In making your decision you need to weigh the costs of taking on the personal loan with the benefits of assuming extra debt with a higher price-tag. This means you need to pay attention, at the very least, to what your credit card charges you for making a cash advance, and what the interest rate is on that payday loan. One thing to keep in mind though:
Never borrow money in order to make another loan yourself or to engage in any other investment activity, however speculative or “safe.” Just take a look at the words of caution on the experience Tomasz Gorecki had when he did this.
It’s bad enough to take on extra debt that you know you can’t pay back in a timely fashion; it’s even worse if the perceived value in doing so is destroyed due to unseen factors beyond your control, such as the many risks involved in every type of investment.
No doubt there are other worthy reasons for taking out a payday loan or cash advance that I haven’t mentioned here. Feel free to discuss them below based on your own experience. From my own perspective, taking out a cash advance is like giving your credit card company permission to double your interest payments – it’s just giving them more free money. If credit card debt is a ten-foot deep hole you’ve dug yourself, the cash advance is … like the shovel falling into the hole. You’re gonna have to go down there yourself before you can get out of this mess, and it’s going to take that much more discipline on your part (which you might have been lacking in the first place). I’m not trying to point fingers (or if I am, it’s at myself – I’m as guilty of credit card debt as anyone) – but this is what it seems like to me.
Here are some great related posts to check out:
Should Parents Pay Off Kids’ Credit Card Debt?
Are In-store Credit Card Offers Becoming More Aggressive?
Five Reasons To Pay Off Debt
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{ 11 comments… read them below or add one }
I only have my check card from my bank, refuse to have a credit card. IF I need to use a credit card, we use my husband’s.
I worked for over 12 years in the credit card industry, in customer service and even though have been out of “the business” for sometime now, can still practically recite by heart the explanation to customers about cash advances. The transaction fees, the finance charges that start IMMEDIATELY and that are pretty much never-ending. I have tried to sit my husband down and tried to explain to him this concept, but his excuse, “It’s a foreign bank, not an American, so therefore is different.” Sorry baby, but it’s still a Visa & MC, each bank may be a bit different, but at the end of the day……… Welcome to the world of credit cards.
Clare, thanks for the link to my site.
And I do hope your readers will understand that with investing, it is not all peachy. Past performance is not a good indicator for the future yet this is the tactic some of these so called advisor’s use to sell you the product.
And i would say, borrowing money for anything that is not guaranteed to make you more money, then don’t do it.
Instead save up the money and then go ahead and invest with it but be open to the possibility of losing it only because you are not as familiar with investing.
Ann, I forgot about the one-time transaction fees that might be added to the bill! Even better reason not to use it. Not sure why your husb. thinks using it in a foreign country is going to be any different, or using a card from a foreign bank.
Tom, the past is definitely no sign of the future, as all economists learned over the last 8 months…they threw their textbooks out the window.
Thanks for the link!
I don’t really think getting a cash advance from a credit card is ever a “good idea”, I can certainly see how someone might get into a situation and feel trapped and feel like it was their only option.
Personally, I like to plan ahead, and keep an emergency fund large enough so i don’t have to worry about the little “emergencies” that pop up. Because I know it IS a good idea to not use credit cards if you can.
Money,
Not to mention the interest on cash advance is 5% higher on most cards. This is a trap certainly best avoided!
In all my 15 years as a credit card using consumer, I’ve NEVER utilized the cash advance feature. That is money that is just too expensive. I’d rather borrow from a friend and pay them the interest!
I think my husband’s thoughts are that since his card is issued from a non-US bank, therefore the terms are totally different. Ok that can and is true to a certain extent in the sense that the country of origin of the credit card may have different laws regulating the banks. But at the end of the day, the bank is going to make big time money whenever a person takes a cash advance.
Forgot to mention earlier, one cannot forget also about if a person uses their credit card in a foreign country, whether for a purchase or cash advance, visa/master tacks on a fee for the currency conversion which is included in the total amount of the charge. Meaning you will never see a separate charge labeled “currency conversion charge”.
Ann, good point about the currency conversion costs when using the cards overseas. Though if it’s the only option, better than having none.
TAM, that’s great. I have to say I agree with that approach and I probably won’t be doing any cash advances again!
MoneyMatters, I’m glad to hear you also would rather never use credit cards at all… I think it’s a good goal to aim for.
I think its a horrible idea. My bookie charges a lower interest rate. Heave you seen these rates?? they have hit 40% and above
I used a credit card for a cash advance while in Romania. It was a horrible idea! It seemed like a great idea at the time, but a year or two later, I finally paid for those finance charges. I thought my credit card was paid off, and then it wasn’t. Surprise!! I say have some money in the bank and use that for emergencies. You don’t want to pay back that sudden emergency for the rest of your natural life.
Hi Everyone! So my boyfriend wants to invest in a gas station with some business partners. He needs about 10,000 dollars for a deposit. He has been trying to get a personal loan for the money, but has not had any luck yet. He just got an offer from Bank of America for a promotional .99% interest rate for 1 year on a cash advance. I was always taught to NEVER take a cash advance on a credit card, but he is running out of options. Since this money is for a business investment, is this one instance where a cash advance is a feasible option?
Please help!