A credit card pricing and terms sheet inundates new customers with grids of information. Buried somewhere between the annual membership fee, transaction fees and penalty APR is a line about cash advance APR and the associated fee. The high numbers should be enough to keep even the most financially illiterate far away from taking money out of an ATM with a credit card – but is it sometimes a good option?
There comes a time in many people’s lives when money in a checking account won’t cover the bills before the next payday. While learning to budget is sound advice, it doesn’t help to hear it when rent is due and the car suddenly won’t start. Many people in dire need of quick cash turn to one of two forms of predatory lending: payday loans or title loans.
Payday lenders provide quick access to cash with no credit check needed, but it comes with a hefty price.
If Sam needs $300 in cash to get the car fixed, but doesn’t have the money, he can borrow $300 from a payday lender. The lender charges a $15 fee for every $100 borrowed, so Sam is paying $45 to borrow $300 for two weeks and will owe back $345. If he’s unable to make the payment at the end of two weeks, then he can renew the loan, which will send him into debt that’s often hard to dig out from.
Title loans require a borrower to give the lender a car title as collateral against the loan, which often needs to be repaid within 30 days – plus a fee of course.
Cash Advance Versus Payday Lending
What if Sam used a credit card cash advance to get access to $300? Cards like Chase Slate and Discover it charge a fee for a cash advance ($10 or 5 percent, whichever is greater) and then an APR of 24.99 percent.
Upfront, it will cost Sam $15 to take out $300 (possibly $18 if he gets hit with a $3 ATM surcharge).
There is no grace period on interest charged with a cash advance. Sam’s $300 is sitting at a 24.99 percent APR from the day it’s taken out, the daily interest rate being 0.068 percent (if the bank divides 24.99 percent by 365). But if Sam pays off his $300 debt at the end of the 30-day month when his statement is due, then he’ll have been charged $6.12 in interest.
All in, including an ATM fee, the cash advance for one month would cost Sam $24.12.
However, different banks have various ways of calculating interest, so the math will vary per specific credit card terms and fees.
It’s certainly not cheap to take out a cash advance, but keep in mind Sam was paying $45 for just two weeks with a payday loan.
In the case of a pinch, a cash advance is almost always a much better option than a payday or title loan.
Setting Yourself Up to Avoid Predatory Lending
Emergencies will arise, no matter who you are or how much money you make. Everyone can take pre-emptive steps to minimize the cost of the unexpected.
- Start building an emergency fund. A minimum of $1,000 helps ward off payday lenders, but six months of living expenses is ideal.
- Establish a personal line of credit with a local credit union. If building an emergency savings fund feels unattainable, having a personal line of credit with a reasonable APR at a local credit union can help you in a pinch. Even if you have a sizable emergency fund, it’s never a bad idea to have a personal line of credit for big emergencies.
- Build your credit score. A credit card can be a useful financial tool provided you don’t amass credit card debt by making frivolous purchases. If a low credit score currently makes getting a credit card unattainable, consider getting a secured card to begin rehabilitating your credit score and report.
Source: Money.ca By Erin LowryJune 2, 2015 | 11:49 a.m. EDT