In the world we all live in, almost everyone has a credit card. As we have discussed in earlier commentaries, there are both advantages and disadvantages of credit cards. All of those aside, I am going to talk today about a certain aspect of a credit card that I hope none of you have deal with, although I am sure some have. This is the aspect of the cash advance. Although this is a very easy way to get cash fast, one needs to be educated on the intricacies of this process as it is complex and costly.
Since most college students are, shall we say, monetarily challenged [poor], it is not uncommon for those students, including myself, to have some tough times in relation to money. As the semester is coming to a close, and all of those financial aid dollars are disappearing at a seemingly exponential rate, you may come into the situation where your bank account is getting low and you overdraft your account. This is an ugly situation, but sadly, it is faced by many students every day. When you are in a situation like this, it is important to step back and think before you take the most convenient way out. A credit card cash advance would momentarily fix the problem, but with fees and other expenses that fix would be short lived.
The first thing one must understand is the fees involved in a cash advance transaction. Fees are computed using two calculation methods. The first way that card issuers calculate fees is on a percentage basis, which typically ranges from 1% to 4%. Other issuers charge “flat fees” for advances, which means you pay the same fee no matter on the amount advance to the customer. A few companies do not charge fees but they are very rare, and one must have good credit to obtain such cards. Finally, if you absolutely have to get a cash advance, try to avoid using the ATM (unless it is operated by your cardholder) because you will be charged an additional fee from the owner of the ATM.
In addition to fees, one must understand that they do not pay the normal purchase interest rate from their card on advances. When you take out an advance, you are subject to interest charges from 20% to 25%. Also, advances do not have any grace period so that high interest percent starts accruing immediately. This means that even if you pay your balance in full, when the bill comes, you will still have paid interest on the advance.
If all that is not bad enough, there is one more thing that most people do not understand about the process. Credit card companies view your normal purchases and your cash advances as almost separate accounts even though they are on the same card. For example, let’s say that you bought $200 worth of goods on your credit card this month and that in addition to this you had to get a cash advance for $50. Now it is time to pay your bill and you send in a payment of $100. One would think that the credit card company would first apply $50 to the advances (since it is a higher interest rate) and then apply the rest to your regular purchases, however, this not how it works. When receiving payments, credit card companies will typically apply payments to the purchase side of your account before covering any cash advances. The only way around this is for the customer to request that the payment be applied to their balance of cash advances.
As we make are way through college, and try to figure out how to pay for everything [seems impossible at times], I hope that you are never put into a situation where you are thinking about a cash advance. However, if you are ever stuck in that situation, I hope you will remember this information and that it will help you to make the most informed and best decision for not only the moment but the future as well.
