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Cash Advances on Credit Cards – a Mistake You Should Never Make

April 1, 2015 By Samantha 13 Comments

Cash advances are offered by different establishments, including charge and credit card issuers. Basically, this is a way to withdraw money from your credit card over the counter or from an ATM up to the available credit limit. Another option is to use a convenience check. The problem with cash advances is that interest charges begin to accumulate immediately. When you charge purchases on your card, on the other hand, you have 15 to 25 days to pay the balance before interest begins to accumulate.

There are different types of advances offered by issuers. Some companies allow customers to tap into their credit line. This type comes with a lower limit and enables cardholders to transfer cash from their card to their bank account and to write checks.LOC28

Does It Affect Your Credit Score?

The answer to this question is “it depends”. One problem with cash advances is that issuers charge significantly higher interest rates and interest accrues from the moment you withdraw cash from your account. Thus you will pay more in interest charges. If high interest payments affect your ability to cover the minimum, then your credit score may suffer. Cash advances may affect your score indirectly by increasing your utilization ratio and hence your balance. When your credit utilization exceeds 53 percent, your credit score is likely to get affected. Depending on the issuer, the credit limit for advances and purchases may be different and it pays to ask. For instance, your card may have a limit of $5,000 on purchases and $1,500 on cash advances. You may want to inquire about this so that you don’t get overextended. The more you borrow in cash, the more difficult it is to pay it back and your score may plummet. This will make it even more difficult to put your finances under control and back in order.

Fees Involved

Issuers usually charge a fee in the range of 3 to 5 percent. They normally assess fees on the amount drawn against the credit limit. With many issuers the amount charged is shown as a percentage. Thus, if your credit card company charges 3 percent, this means that you will pay $3 per each $100 borrowed. If you get more in cash, for example, $500 and your bank charges 5 percent, you will pay $25 back. Some financial institutions add this fee to the customer’s monthly bill while others deduct it from the advance. There are three types of fees involved, ATM usage fees, interest charges, and transaction fees. ATM usage fees vary but are around $2 – $2.50 on average.

Interest Rates

Interest charges vary from one issuer to another, but the rate is usually 5 – 6 percent higher compared to the bank’s standard rate. The average interest rate on advances is 25 percent but charges vary widely – from 10 to 36 percent. There are financial institutions that offer the same rate on advances and card purchases. The interest charges depend on the number of days interest has accrued. To calculate the charges on your advance, first divide the rate by 365 (number of days in a calendar year). Use this number and multiply it by the amount withdrawn and the number of days interest has accrued. For instance, if you get $800 in cash, the rate is 25 percent, and you paid back in 20 days, your bank will assess $10.96 in charges (25 percent / 365 days = 0.0684 x $800 x 20 days = 1,095.89 /100 percent = $10.96). This means that you will pay about $11 for 20 days.LOC29

Alternatives to Cash Advances

There are different alternatives to cash advances, and probably the best option is to ask your parents or family for a small low or no interest loan. Another option is to use cash in your Roth IRA. There are other alternatives to credit card cash advances such as a salary advance from your company, a collateral or secured loan, or a consumer loan from your local bank or credit union. Some borrowers also opt for payday and title loans but the interest charges are significantly higher. This is a good choice for borrowers with tarnished credit who need urgent cash. Payday loans are convenient and easy to get, and finance companies often advertise online application and instant approval. Peer to peer loans are also offered to individual borrowers. The good news is that private lenders have more lenient approval criteria compared to banks. Some lenders should be avoided at all costs because they use blackmail, threats of violence, and other illegal practices. Loan sharks are one example.

What Not to Do

Obviously, it is best to avoid cash advances altogether and use money in your savings account to meet urgent expenses. Using advances on a regular basis makes you a risky borrower in the eyes of potential creditors. It is quick and simple to withdraw money from an ATM which can lead to a downward debt spiral. The problem is that many customers find cash advances too convenient and use their credit cards to get quick cash. Some borrowers also use their cards to pay existing balances such as consumer and student loans. This is a bad idea because unsecured loans go with a significantly lower rate compared to advances on your credit card. There are circumstances, however, when tapping into your credit line makes sense. This is the case when you have utility bills or medications to pay for and there are no other ways to meet these expenses. In other words, this is a borrowing solution to use in emergencies if you have exhausted all other options.

Conclusion

Cash advances are offered by many credit card issuers, including finance companies, unions, and banks. This is a useful option in case of emergency when you need cash immediately. However, it is also quite expensive and should be used as a last resort. In addition to the higher interest rates, there is no grace period. Lenders offer high rates because they know that borrowers who tap into their line are desperate for money. Given the many alternatives available, it pays to shop around and contact local financial establishments for a small loan. If you get an advance, however, keep in mind that this is not a long-term solution to your financial worries. You should pay back as quickly as possible. Better open a savings account and use it as a rainy day fund for emergencies.

Find a Low Interest Balance Transfer Credit Card

March 3, 2015 By Samantha 1 Comment

Balance transfer cards are often used to move high interest balances to a card with a low interest rate. This helps save on interest and pay down existing balances over a shorter period of time. Also known as debt consolidation, borrowers with multiple high interest cards often transfer their balances elsewhere to benefit from a zero or low interest introductory rate.

I Get a Lot of Balance Transfer Promotions in the Mail. What Happens after the Introductory Period Expires?

Many issuers advertise balance transfer cards by mail as a way to attract new clients and increase their customer base. When the introductory period expires, the standard rate applies to all purchases charged on the card. The standard rate varies from issuer to issuer and can be as high as 30 percent. Usually financial institutions offer rates ranging from 11.99 to 21.99 percent, based on your credit profile. Applicants with a history of missing or late payments are usually offered high standard rates.

When the introductory period is over, interest payments increase, and it is a good idea to pay the full amount. If you only pay the minimum, interest charges accumulate with time.LOC25

Is Balance Transfer for Me?

This depends on many factors, including interest charges on all cards held, penalty interest, credit limit, grace period, income level, and more. Look at different offers, rates, transfer fees, and criteria for approval. Some financial institutions only accept applications from clients with stellar credit while others have more lenient requirements. In addition to your credit profile, consider how many balances you have, whether late or missing payments are an issue, and if a low interest card with an intro period will help you pay down your card debt. This depends on the length of the introductory period and the amounts owned. As a rule, a balance transfer is a good choice if you find it difficult to keep track of due dates and monthly payments and miss payments as a result. This can be a problem, especially if you have a fair or poor credit score. Your score is likely to suffer.

Transferring existing balances also makes sense if you hold multiple cards and pay the minimum only. In this case you pay a lot in interest charges which makes card debt expensive. Whether this is a good option also depends on the types of cards held. Department store cards, for example, charge higher interest rates. Finally, you may want to consider your financial situation and short- and long-term goals and whether alternative solutions make more sense. Depending on the types of debt held, there are alternatives such as credit counseling, negotiation with creditors, and individual voluntary arrangement. Other alternatives include debt restructuring, bankruptcy (as a last resort), and formal proposal. A balance transfer is a good choice if you mostly have credit card debt (i.e. revolving credit). In any case, ask for charges such as transaction fees, the nominal rate, the teaser rate, and others. Most banks offer a teaser rate over a period of 6 to 15 months.LOC24

How to Find a Low Interest Balance Transfer Credit Card

Check with different issuers, including online banks and brick-and-mortar banks, caisses populaires, unions, and credit card companies. If you are a union member, this may be a good starting point. Credit unions usually offer cards with affordable rates and are more willing to work with borrowers with average or compromised credit. Many issuers offer cards by Discover, MasterCard, American Express, and Visa. Some financial establishments also offer cards with low intro rates and perks such as cash back, a long introductory period of 18 months, no annual fee or annual fee waivers, and many others. Ask whether they can offer a potential savings estimate provided that you make on-time payments. Some issuers also offer one-time bonuses, and holders enjoy additional savings. To find a low interest card, also check with major banks such as MBNA, Scotia Bank, CIBC, and others. You may also ask your family, colleagues, and friends about their credit card experience.

Top 3 Balance Transfer Credit Cards

MBNA, President’s Choice Financial, and Scotiabank offer cards with premium benefits and optional extras. Some cards offer perks such as extra bonus points, discounts, and competitive standard rates.

Scotiabank Value® VISA card

sbScotiabank offers a Visa card with a low intro rate of 3.99 percent. The best part is that the bank charges no balance transfer fees. The low rate applies during the introductory period (6 months). The card features perks and benefits such as car rental discounts, optional card protection, telephone banking, and more. The fact that there is no annual fee means that borrowers benefit from additional savings. Applicants are free to order supplementary cards.

• Annual fee: none
• Interest rate: 16.99 percent
• Grace period: 21 days or more
• Min credit limit: $500
apply

MBNA Platinum Plus® MasterCard® credit card

mbThis is another good balance transfer option for borrowers who use high interest cards. MBNA offers a longer introductory period of 12 months and zero introductory interest on balance transfers. While this card features no rewards, customers are offered the opportunity to save on interest charges over a longer period. MBNA also features optional coverage in case of accidental death, critical illness, disability, and involuntary unemployment. Canadian residents who are of legal age and have a Canadian credit profile meet the eligibility requirements.

• Annual fee: none
• Grace period: at least 21 days
• Interest rate: 19.99 percent

President’s Choice Financial World MasterCard

pcPresident’s Choice Financial features a balance transfer card that offers the opportunity to earn bonus points for travel services and at participating stores. The card offers standard benefits such as purchase assurance and extended warranty and optional extras and perks such as account balance protection in case of involuntary job loss and disability. One of the main benefits for customers is the low balance transfer rate of just 0.97 percent over a period of 6 months. Customers also benefit from flexible and convenient online banking that allows them to view e-statements and their account summary, check available credit and existing balance, and more.

• Annual fee: none
• Interest rate: 19.97 percent
• Penalty interest rate: 24.97 percent
• Grace period: at least 21 days

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