Suppose you take out a cash advance on your credit card, make a few charges and end up with a balance of about $1,000. You can’t pay it all off at once so you carry the balance and pay as much as you can every billing period. Unfortunately, it seems you can never get the balance to decrease because the cash advance has such a high APR attached to it it’s eating up all your payments.
So why exactly is your cash advance still on your statement after all these months, maybe even years? Currently, credit card issuers are not bound by any laws or regulations that tell them how to apply the payments you make to your account. Basically, they can apply your payments however they decide, and in general they choose to apply all of your payments to the balance with the lowest interest rate. When you signed up for your credit card account you agreed to terms that stated the interest rates for all transactions. Most credit card companies charge you one interest rate for purchases and another, higher interest rate for cash advances. You may even have yet another rate for balance transfers.
Your credit card issuer is in this to make money. To make as much as they can from you they charge you a high interest rate for your cash advances and then apply all payments to the lower interest balances first. What does this mean exactly? Until you pay off all of the purchase balance on your account you won’t even be able to touch the cash advance balance. Meanwhile, the cash advance balance is accrueing an inproportionate amount of interest, running your account balance up and making it difficult to pay your account off.
Now, if you continue to make payments on your account, eventually you’ll pay off all the lower interest balance and be able to get to the cash advance portion. This may take years, however. You have a couple of options if you’re desperate to avoid the high fees you’re paying.
Option number one: use interim payments to lower the total number of days that the balance is outstanding. This works like an extra mortgage payment each year. Simply pay extra money to your credit card account as soon as you can and you’ll avoid the month’s interest from being charged.
Option number two: you can also transfer the entire balance to a balance transfer credit card with a low rate, or a 0% introductory APR. As long as you don’t make any new purchases with the new credit card you’ll be saving hundreds of dollars in interest you would have been paying. Just make sure you read the terms and understand the fee you’ll be charged for such a transfer.
Fortunately, the new Credit CARD Act of 2009 will put an end to unfair payment allocations by credit card companies, moving the industry toward a more consumer-friendly environment.
Remember, cash advances on your credit card are always a bad idea. The interest you’ll be charged can be as high as 29.99% and if you have an existing balance on the card there’s no way you’ll be able to pay off the cash advance until the rest of the balance is gone. You’re also looking at a hefty fee to take out the money: as much as 4% of what you withdraw. Always look for another option first before even considering a cash advance.
To learn more about the fees you’re paying on your credit card and the changes that the new Credit CARD Act will put into effect, here are a few helpful articles.
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