Why are cash advances bad for credit card users? here’s why

Rebecca V. Hennen

March 11, 2021

Why are cash advances bad for credit card users? here’s why

Despite the increase in credit card debt, more and more consumers are avoiding this expensive type of credit card use.

According to a new report According to the Consumer Financial Protection Bureau (CFPB), the percentage of Americans who use their credit cards for cash advances has declined significantly in recent years. This is certainly good news, because a cash advance is one of the worst ways to use a credit card.

Here is the trend in cash advance activity in the United States and why cash advances are such a bad idea.

The percentage of cards used for cash advances has increased from around 3.5% in 2015 to around 2.5% currently. This contrasts directly with the overall trend in credit card debt – credit card debt recently eclipsed $ 1 trillion for the first time and has never been higher. Thus, the fact that consumers seem to use their cards more for shopping and less for cash advances is a rather encouraging sign.

In fact, while credit card balances have increased by about 15% since 2015 and the volume of purchases has climbed by about 25%, the volume of cash advances has only increased by 2% in the past. during this period.

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Why is a cash advance such a bad idea?

Many consumers mistakenly believe that a cash advance is not such a bad idea because it is no different from any other credit card purchase. However, this is not the case. There are three main reasons why cash advances are different:

Higher interest rate – Many (but not all) credit cards have separate interest rates for purchases and cash advances. And when they do, the APR charged for cash advances is always the higher of the two. For example, a credit card might have an APR of 17.99% for purchases and 25.99% for cash advances. Plus, while the APR on purchases usually doesn’t take effect until after your statement is due, interest immediately begins to accrue on cash advances. Check your cardholder agreement and you might be surprised at the difference.
Cash advance fees – It is also common practice for a credit card issuer to charge a cash advance fee; 3% of the amount of the advance is the most common. This means that if you take a cash advance of $ 500, $ 515 will actually be debited from your account. So even if you pay your cash advance the next day, you will end up paying a lot more than what you took out.
No reward – Finally, if your credit card has rewardslike cash back or airline miles, cash advances probably don’t count toward these rewards. In other words, if your credit card gives you 2% cash back, you’ll get $ 20 on a $ 1,000 purchase, but you probably won’t get anything for a cash advance.

Simply put, there are three reasons why a cash advance is not a desirable way to use your credit card. But to be fair, there are valid reasons for using a cash advance. In an emergency, this is certainly a better way to get money than a personal loan, for example. That said, cash advances on your credit card are expensive, so they shouldn’t be used unless you really need them.

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An encouraging trend

The rate of use of cash advances has fallen by about a third in recent years, and this is a large fall. There could be several reasons for this decline, other than consumers simply becoming more financially responsible. For example, wages are rising and unemployment has fallen, so that fewer people can need take cash advances. And rising interest rates have made credit card APRs even higher, which could discourage people from borrowing.

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