Editorial Policy

Cash Advances: For Emergency Use Only

Erica Sandberg

June 5, 2012

QDear Erica,

I’m wondering if I should do a cash advance with my credit card. I owe my roommate $800 (he paid for my half of the rent the past two months because I didn’t have enough). In July, I’m moving in with my sister for free, so my buddy  has been  really persistent about getting the money from me before I move. I don’t want to make excuses, but I lost my full-time job and just started a part-time one. I’ll be lucky if I can pay my half of the June rent, let alone what I owe him already. So I’m thinking my card would be the only way for me to get $800 right away. My card has a $360 balance on it. My limit is $3,000. I’ve never done a cash advance before, and I don’t want to, but I’m sick of feeling guilty all the time about what I owe my friend. So how do I do it? And should I do it? Is there anything else I’m not thinking of that I could do? — Peter

AHi Peter,

I rarely recommend people use cash advances because they tend to be too costly. Such credit card loans come with:

  1. Expensive fees. Credit card issuers charge up to 4 percent of the amount extracted. Therefore, if you were to obtain an advance of $800, up to $32 would be added to the debt.
  2. Instant interest accumulation. Unlike with a purchase where you have an interest-free grace period, issuers begin to assess interest the moment the money is in your hand.
  3. Elevated financing costs. It’s common for issuers to charge a higher annual percentage rate (APR) for cash advances than they do for purchases. Check your statement or give them a call to see if yours does.

Those are the reasons I would shy away from cash advances. Not that this is a habit you’ve gotten into, but it’s worth warning against. Never automatically turn to a bank for help when you’re in a tight spot.  Rather than being a long-term solution to problems, borrowing more money becomes a pricey Band-Aid.Ask Erica

So, yes, consider other methods to scrape up some funds before swiping your card. For example, you could sell something of considerable value. Look around for items you can do without, such as a bicycle that you might not ride anymore. Or have a garage sale to get rid of a whole bunch of little things that will add up to a lot. Even if the proceeds don’t cover the entire amount you owe, if it’s a big enough chunk, it may be enough to satisfy your friend until you can give more.

In the event that you have nothing at all to sell or that your buddy just wants the cash right now, fine. He did you a major favor, and you’ve to make good on it on his terms. This may be one of those rare occasions I say take the cash advance. Swallow the extra costs involved, and pay the man. After you do, make a commitment to not draw from your account this way again. Delete your total debt in a maximum of three cycles, too. With the balance that’s already on the card, that would mean payments of about $415 per month, assuming an APR of 22 percent.

Will that be hard to do while only working part-time? Sure. But struggling though a financial dilemma when you’re young and able-bodied is part of becoming self-sufficient and strong. In years to come, you can even impress your children with the classic, “Why, when I was your age I lived on nothing but noodles for a few weeks to make sure I repaid my pal/got out of a jam/met my bills — and so can you!”

Got a question for Erica? Send her an email.