The Financial Pitfalls of Credit Card Cash Advances

Let's face it. Times are tough, and, for most of the nation, it doesn't look like things are going to get much better any time soon. As a result, many Americans have taken unusual, drastic measures to get their bills paid. One of the most dangerous, in my opinion, is using credit card cash advances. Even for a bill as important as your home mortgage payment, I believe cash advances are a slippery slope that most people are ill-equipped to handle, especially if they are already in financial distress.

While I think making a mortgage payment should be everyone's top priority, please consider the following information carefully before pulling a cash advance off your credit card to pay this or any bill.

First, re-read your credit card disclosures. For most cards, cash advances incur a "transaction fee" for merely taking the cash advance. These fees can be as high as 3 - 5% of the amount of the advance. Note: This means you need to calculate the cash advance plus the fee to make sure you have a sufficient available balance on your card. Even if your actual advance is within your limit, if the fee puts you over, your advance can be declined or, if it is approved, you can be charged an overlimit fee. On most of my credit cards, going over my established limit incurs a $39 fee.

The second item to check out is the interest rate. Do not assume if you have a reasonable interest rate on purchases, that you have the same interest rate on cash advances. A quick glance at some of my own credit card fees found cash advance interest rates of nearly 25%. That's a hefty premium to be paying for any loan.

Also, be aware that while many credit cards will provide you with a grace period on purchases if you pay your credit card bill in full each month, this is not so with cash advances. Cash advances are usually charged interest from the date of withdrawal until the date of repayment.

Having said all that, I realize some of you still feel that a cash advance is your only option. Your outgo is greater than your income, and you've got to keep your head above water until your ship comes in. I've been there, and I, truly, feel your pain.

If you have to resort to credit card usage to keep the lights on, here's the best way to do it.

I'm assuming here that you have some cash coming in, just not enough to pay all the bills. In this case, pay everything you can pay on a credit card. This may be a larger list than you might think. Most people are aware that grocery stores and the big box stores will take plastic for all your basic needs - food, sundries, and pharmaceuticals, but have you thought about other living expenses?

Check and see if the following companies won't take a credit card for payment.

Telephone company
Cell phone provider
Internet service
Electric bill
Gas company
Water bill
Cable bill
(Although, if you can't pay your mortgage, I suggest you shut off the cable.)
Doctors and dentist offices (Are your children in braces? Ask your orthodontist.)

In regards to utility payments, be sure to check with the collection agency. If you are paying directly to the utility company, in person or on-line, there may not be a fee. If you pay at an authorized payment center, like your local drug store, you may be charged a convenience charge - which is anything but convenient.

Swipe your card at the gas pump as well. The 3 or 4 cents more per gallon you may pay if your station offers a cash discount will be quickly offset by saving those credit card transaction and higher interest fees.

Save as much of your cash for those items that you can truly only pay with cash - like your mortgage or rent payment. Just make sure you keep enough cash in reserve to pay the minimums on all your credit card payments. Late or missed payments will incur hefty fees as well.

By using this strategy you will eliminate the cash advance transaction fee and keep your interest charges to the usually lower purchases rate.

If you still do not have enough cash to pay your mortgage or rent payment, you may have to resort to taking a cash advance. My advice in this scenario is to only take what is absolutely necessary and pay it off as quickly as possible. Also, be mindful of where you get your advance. Many ATMs charge an additional fee. Retrieving your advance from a bank teller or with a cash advance "check" will usually only incur the transaction fee and higher interest rate charges.

Note: One of the benefits of the Credit CARD Act is that credit cards companies will have to apply all payments over the monthly minimum payment to credit with the highest interest rate. This rule does not take effect, however, until February 22, 2010, so, in the meantime, be prepared to watch your payments discharge the lower rate balances.

Lastly, before next month's payment rolls around, look for ways to earn enough cash to bridge your shortfall.

In need of suggestions? Check out my "Five Easy Ways to Earn Extra Cash".

If your financial circumstances have changed permanently (or at least for the foreseeable future) and you are no longer able to afford your mortgage payment, be sure to read my article on "Making Your Home Affordable - How to Modify Your Mortgage" to determine if you are eligible for the government modification program available to home owners.