Generally speaking, when you use a credit card, you use it at the point of purchase. The value of the products that you’re buying is charged onto your card, increasing the balance that you owe. Ideally, you will simply pay off that balance at the end of the month. If you do not, the remaining portion accrues interest.
But you can also get a cash advance on many credit cards. This can sometimes be done in person or at an ATM. In the same way that you would make a purchase, the cash advance that you take out goes against the balance on your credit card. So you may get $500 in cash immediately, but you still have to pay that back at the end of the month.
Why can these be problematic?
One issue with cash advances is that they make it easy for people to increase the amount they owe on their card, potentially going beyond the point where they can pay it off at the end of the month. Many credit cards have significant interest rates. These could range from 18% to almost 30%. Failing to make the payment on time means that you owe much more than the $500 you borrowed.
On top of that, you may have to pay other fees. This could include a bank fee, an ATM fee or a specific cash advance fee. All of these vary depending on the credit card and ATM that you’re using, but you could end up paying 5% as a fee on top of the money that you’re withdrawing. Again, this just increases the amount that you owe, which could then trigger interest payments in the future, dramatically increasing your debt.
People sometimes get caught in a cycle of using credit cards and taking cash advances, and then they cannot afford to pay off everything that they owe. If you find yourself in this position, it’s important to look into your legal options, such as using Chapter 7 or Chapter 13 bankruptcy.
