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How to get out from under a cash advance

Erica Sandberg

October 3, 2014

QHi Erica,

I took out a cash advance on my Visa for $1,500 six months ago, and now it's killing me. I've paid off about $300 of it, but it seems as though I'm not getting anywhere. I also have $800 on another credit card, but that's not from a cash advance, so it has a lower APR. How do I get out from under this, and how do I prioritize? —Laci

ADear Laci,

The best thing you can do is to pay off all of your debt, fast. How? With large, aggressive payments that sting. The reason I say that is because I actually want you to have a negative association with charging more than you can afford to repay quickly. Once that feeling is in place, it should return each time you consider borrowing money in this way. Hopefully, you'll be motivated to use the cards only for financially sound transactions that will result in positive emotions.

But that's in the future. Right now, you are correct that prioritizing the accounts is a key factor in efficient debt deletion. As you only have two of them, this will be an easy task.Ask Erica

There are a couple of schools of thought about which balance to concentrate on. One is to focus on eliminating the smallest obligation before moving on to the larger ones, no matter what the interest rates are. Yet, while the benefit of such a plan is that you may experience a sense of relief when one debt is gone, potentially keeping you engaged and excited, it does not make economic sense.

Instead, I strongly recommend that you send the maximum amount of money to your most expensive debt — which for you is the cash advance. Until it is at a zero balance, send the account with the less costly liability the minimum payment.

First, you need to figure out how much money you have to send to the accounts in total. Be tough on yourself. Review your income and expenses, and make some hard choices. Pare down your spending enough so you have a substantial amount to give your creditors. If you can't make major changes, increase your income with overtime or get a second, part-time job.

Let's say you find that you have $350 left over from your paychecks. Great! The minimum expected payment for the $800 debt should be around $30, so pay that for now. That would leave you with $320 for the other, more costly debt. Send that sum each time you get the bill and it will be at a zero balance in about four to five months (assuming a 21 percent APR). After that, reroute the cash you had been sending to whatever remains on the first account. Done.

But, back to cash advances. They are almost never a good idea. First, there's the fee that you have to pay to walk away with the cold, hard cash. It's typically 3 to 5 percent of the advance. When you took yours out, $45-$60 was added to your balance. Finance charges begin to accumulate the moment you withdraw the funds, too, and since the interest rate is usually higher than it is for purchase debt, you're looking at a lot of your hard-earned money going toward those fees.

Even if you're using the card to buy items and pay for services, it is always a good idea to stop and question the transaction. Ask yourself if you'll have the funds to pay the entire balance with ease in 30 or so days. If so, proceed; if not, don't charge

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