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A
credit card-based
cash advance is a method allowing the card
holder to convert a portion of their available
credit limit to cash. The method of obtaining
the cash can range from using the credit card in
an authorized ATM, writing special cash advance
checks against the card’s open to buy credit
limit, or presenting the card in person at an
authorized bank or lending institution. A cash
advance is, in effect, a loan.
Unless the card issuer is making a special cash
advance offer, receiving a cash advance, even if
it is paid back quickly, is one of the most
expensive methods of borrowing money. That’s
because of several reasons which include:
-
Cash Advance Fee
This is a fee that the card issuer levies
whenever a cash advance is accepted. Although
some special offers may establish a flat-rate
fee, it is usually a percentage of the amount
borrowed. Depending upon the state where the card
is issued, that percentage rate can be quite
high. The average fee runs between 3% and 9%.
-
No Grace Period
Except for some secured
charge cards, issued to buyers with poor
credit,
charge card companies allow a
grace period of 20-30 days, on average, for
the cardholder to pay new charges off in full
without incurring interest. This feature is
usually not available when a cash advance is
taken, so interest starts accruing at the moment
the cash is received and continues to compound
until the loan is paid in full.
-
Higher Interest Rates
Card issuers almost always charge a higher
interest rate for a cash advance then they do
for normal purchases. This may not be apparent
unless the terms and conditions of the cash
advance are examined carefully. Some charge card
issuers may charge the maximum interest rate
allowed by the laws of the state where they
issued the credit card from. In the case of South
Dakota, home to Citibank
credit cards and several others, that
interest rate can be as high as 20%.
-
Payments Applied To Purchases First
The credit card issuer will apply the monthly
payment to normal charge card purchases first. If
there is anything left after that payment is
applied then it will be posted against the cash
advance. This means that if a cardholder only
makes the minimum monthly payment, it could end
up taking years to pay back the cash advance.
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