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Why are Cash Advance Interest Rates so High?

Written by and posted on October 13, 2011

Credit card cash advances are often a bad idea. That’s because a cash advance can be significantly more expensive than a typical credit card charge. One reason for that is the fact that cash advances generally have much higher interest rates than purchase rates.

Let’s look at why cash advances can be treated differently by credit card companies, and another reason cash advances are so costly.

What Cash Advances Are (and Aren’t)

A cash advance isn’t quite the same as a typical credit card charge. It works almost more like a payday loan. It isn’t designed for long-term financing where you can pay your balance over several months or even years.

A cash advance is instead designed to tide you over for a short period or to give you access to your credit limit in situations when your credit card might not be accepted.

Ideally you’ll rarely, if ever, use your credit card to get cash at an ATM. If you do, you should only do so if you can pay that advance off quickly.

Why the Rates Are Higher

It’s logical for cash advance rates to be higher than purchase rates. People who desperately need cash are potentially bigger credit risks — especially those in that position repeatedly. A higher cash advance rate can serve as a deterrent to encourage consumers to exhaust all other options first when they need money quickly.

Also, the higher rates can stop some individuals from withdrawing cash for things a credit card isn’t meant to cover — such as shuffling money around to pay for other debts.

In Addition to High Interest

If the extremely high cash advance interest rates aren’t enough to discourage you from hitting the closest ATM, don’t forget about cash advance fees. These also add to the cost. A cash advance fee is often a percentage of the amount you withdraw.

The more you withdraw, the riskier that can seem to a lender, and the more you end up paying. It wouldn’t be uncommon to pay a cash advance fee of 3% or more up front in addition to the high interest. Oh, and that interest starts accumulating as soon as you take the cash advance — no interest free days. As a consumer, you’ll rarely win with a cash advance.

About the author

Roland Bleyer

Roland has years of experience in the financial industry and is the founder of the Credit World group. He has overseen Credit World grow to become the number one reseller of retail banking products. He is a regular contributor to this blog and and aims to help people make the most of their money and help the consumer find the best possible product. Roland dedicates his time writing finance articles to provide people with information they need. You can find him on Google+ & twitter

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