Cash Advance APR: What You Need to Know
When it comes to managing your finances, understanding the terms and conditions associated with credit cards is important. One of the most important factors you need to be aware of is the cash advance Annual Percentage Rate (APR).
In this post, we’ll dive into what a cash advance APR is, how it works, and its potential consequences so that you can be fully informed when using your credit card for cash advances.
What is Cash Advance APR?
A cash advance APR (Annual Percentage Rate) refers to the interest rate charged on a credit card account when you withdraw funds in cash from your available balance. It’s usually higher than regular purchase APR because of its high-risk nature.
Typically, cash advance APRs are around 25% or more depending on the issuer and other factors. This means that if you take out $1,000 as a cash advance at an interest rate of 25%, you will end up paying $250 in interest alone over one year.
How Does Cash Advance APR Work?
If you’re planning on taking out a cash advance from your credit card account, here’s what happens:
Firstly, when withdrawing money through an ATM machine or bank branch using your credit card account, there’s typically a transaction fee charged by the issuer which ranges between 2%-5% depending on various factors such as location and amount withdrawn.
Once you’ve made the withdrawal and received your funds in hand or transferred to another account electronically, interest starts accruing immediately. Unlike purchases where there’s usually a grace period before interest starts accumulating (usually within 21 days), there’s no grace period for withdrawals made via ATM machines or bank branches.
Additionally, unlike regular purchases where issuers offer varying “minimum payments,” most issuers require borrowers who use their accounts for withdrawals pay off their balances within one cycle. Interest rates fluctuate based on market changes but remain fixed once a cash advance transaction has been made, regardless of whether the borrower pays off the balance or not.
Consequences of Cash Advance APR
Taking out a cash advance can be costly due to its higher interest rates and fees associated with it. Here are some potential consequences that could arise from using your credit card for cash advances:
1. Higher Interest Rates: As mentioned earlier, most issuers charge an APR in excess of 25% on cash advances which is significantly higher than regular purchase APRs of 14-20%. This means you will pay more in interest every month and over time.
2. Transaction Fees: Most issuers charge a transaction fee ranging between 2%-5% for withdrawals made via ATM machines or bank branches.
3. No Grace Period: Unlike regular purchases where there’s usually a grace period before interest starts accumulating (usually within 21 days), there’s no grace period for withdrawals made via ATM machines or bank branches.
4. Damaged Credit Score: Piling up debt through frequent use of cash advances can negatively impact your credit score because it increases your utilization ratio—the amount you owe relative to the amount available to you—and late payments if they occur.
Who Should Use Cash Advances?
Cash advances should only be used as last resort options when other forms of funding aren’t available such as emergencies like medical bills, car breakdowns, etc., but even then, caution must be taken. If possible, try borrowing from family/friends first before resorting to withdrawing money from credit cards since this method comes at an additional cost that could lead to more debt accumulation over time.
Alternatives to Cash Advances
If you need quick access to funds without going through the hassle associated with taking out a cash advance from your credit card account, here are some alternatives worth considering:
1) Personal Loans – Personal loans offer lower interest rates compared to those charged on credit cards and may have longer repayment periods depending on various factors.
2) Payday Loans – These are short-term loans that come with high-interest rates and fees but offer quick access to cash. They should, however, be used sparingly, as they can spiral into a cycle of debt if not repaid on time.
3) 0% Introductory APR Credit Cards – Some credit cards offer an introductory period where no interest is charged for a specified period after opening an account. This option can work well for borrowers who need to make large purchases or consolidate existing debt without accruing any additional costs in the form of interest during the introductory period.
Conclusion
In conclusion, taking out a cash advance from your credit card account should only be done as a last resort when other funding options aren’t available. It’s important to note that while cash advances provide quick access to funds, the associated fees and charges could put you at risk of accumulating more debt than you initially planned.
Before making any decisions about borrowing money through cash advances or other forms of funding such as personal loans or payday loans, weigh up the pros and cons carefully and ensure that it aligns with your financial goals in both the short- and long term.