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Most credit cards allow individuals to withdraw cash from ATM s or to draw on cheques. Using a card like this can be expensive & can accelerate credit card debt problems.
Credit cards don't have to be purely used for purchases. Most also allow consumers to make cash withdrawals at an ATM like a debit card. Some providers also issue credit card cheques to their customers which can then be used like cash. Both of these cash advance methods, however, come with some downsides. Why is it generally not a good idea to use a credit card cheque or a cash advance?
Credit Card Cheques & Cash Advances Have Higher Interest ChargesCredit card companies can attach various interest rates to their products. They may, for example, have one rate for purchases and another rate for other types of card usage. The rate given to regular spending may be relatively low but other rates may be considerably higher.
If the cardholder uses a credit card cheque or withdraws money using their card then the chances are they will be charged a much higher interest rate on the cash they use. If they do not pay off all that they have borrowed when their next bill falls due, then their debt will grow at a faster rate than if they had used their card to make a purchase.
Cash Advances, Credit Card Cheques & the Negative Payment HierarchyHaving to pay a higher rate of interest isn't, however, the only potential issue here. The way that the card company allocates payments that are made to the account may also add to the overall debt for the individual.
Although many think that the payments they make on cards are allocated evenly across all spending, this isn't necessarily true. If a card company uses a negative hierarchy of payments then they can take the repayment and use it pay off all general purchasing first. Any cash advances given via cheque or cash withdrawals can sit at the back of the queue unpaid until this spending is repaid.
Remember that any cheques and cash advances that were made on the account will be accruing interest at the higher rate. This kind of borrowing can take longer to pay off and can cost the cardholder more to clear on this basis.
Using a Credit Card Cheque or a Cash Advance May be a Sign That Help is NeededSome people use a cash advance infrequently to tide them over during a tight month. Others may use a credit card cheque to pay for something specific on a one-off basis. The additional charges may be bearable in these instances. But, if the cardholder gets into the habit of relying on their credit card to access cash then they may have a deeper debt problem.
Those that find that they have to withdraw cash on cards every month just to get by, for example, often find that this is one of the first warning signs of credit card debt problems. They may, therefore, want to take advice to find alternative debt management solutions that could help them regain control of their finances.
