Cash Advance Follies
One of the advantages I’ve found by handling all my finances online is that I don’t have to deal with those pesky cash advance & balance transfer checks that are carefully folded into my paper statements. You know what I’m talking about, right? Credit card companies market the checks as opportunities to finance that outdoor Jacuzzi you’ve always wanted or to pay off your debts.
Don’t be fooled.
A general rule of them for dealing with credit card companies is that anything they try to push on you will put money in their pockets, not yours. Convenience checks & cash advance offers are no exception. Convenience checks are convenient for the credit card company, not you.
Technically, the convenience checks are actually balance transfer checks. A cash advance is where you withdraw money from an ATM using your credit card. However, the principle is the same.
What’s wrong with using convenience checks or taking a cash advance at an ATM?
The problem is in the fine print. Credit card companies assign different interest rates to different types of transactions. If you look at your statement closely, you’ll see three different interest rates: one each for purchases, cash advances, and balance transfers. Typically, the cash advance and balance transfer interest rates are several percentage points higher than that of purchases. The multiple interest rates have two important ramifications.
Firstly, the varying rates mean that you’ll pay much more interest for cash advances and balance transfers. 99% of the time, your credit card’s grace period does not apply to cash advances and balance transfers; it only applies to purchases. Without the grace period, you are charged interest beginning the day you make the transaction.
Secondly, credit card companies apply your payments to the sub-balance with the lowest interest rate first. Higher interest rate sub-balances accumulate interest untouched until the lower-rate sub-balances are paid off. This is designed to maximize the amount of interest you must pay, and is the exact opposite of what you would do if you were trying to get out of debt. Let’s say your credit card’s purchase interest rate is 10% and the cash advance interest rate is 15%. Your purchase balance is $1,000 and you take out a $1,000 cash advance. Your entire monthly payment will be applied toward the purchase balance which costs only 10%, while your cash advance balance accumulates interest at 15%!
In the previous example, I assumed that the cash advance rate is higher than the purchase rate. Most of the convenience checks offer special promotion rates, sometimes with no interest! Sound tempting? What happens when the balance transfer rate is lower than the purchase rate? Here’s what happens when you take advantage of one of these promotional offers. Let’s say you get a 0% convenience check offer, and decide to use one of the checks to install that new pool in your backyard. You continue to use your credit card for purchases. As I stated above, credit card companies apply your payments to the sub-balance with the lowest interest rate. In this case, your entire monthly payment is applied toward your 0% convenience check loan, while your regular purchases amass interest at 10%! Since it takes you a long time to pay off your pool, even at 0%, your normal, everyday purchases cost you thousands of dollars in interest. In the end, you end up paying more interest than you should have.
Smart alternative to convenience checks & cash advances
There’s something even more convenient than your credit card’s so-called “convenience” checks: cold, hard cash in a savings account. Instead of using your credit card to buy now and pay later, consider putting money away in a savings account for major purchases. Not only will you save yourself a substantial chunk of interest, but also you’ll end up earning interest.
Saving money is easy. Just take a few moments to open an ING DIRECT Orange Savings Account online. The Orange Savings Account is the nation’s highest yield savings account. And there are no fees or minimums.
The next time you need a cash advance, take it from your savings account, not your credit card.
