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Q: A medical emergency has come up and my rainy day fund can’t cover all the expenses. I need money now. But I know don’t what to do. Should I get a cash advance on my credit card or take out a payday loan?
A: Of the two options, your best choice is almost always going to be a cash advance.
If you look at the fees you pay for payday loans, some can add up to an interest rate of 911% for a one-week loan (http://www.consumersunion.org/finance/paydayfact.htm). I don’t know of a single credit card that charges a rate that high.
Cash advance APRs are usually in the upper 20s. Most cash advance APRs cap out at around 30%, except for those with very poor credit.
Even so, cash advances can be dangerous, too.
The problem with them is the way interest is applied to your balances.
According to federal law, anything above the minimum payment is applied to the highest interest-rate balance (usually the cash advance). However, the minimum payment can be applied to whatever the card issuer wants. Usually this means a minimum payment applies only to balances at lower rates.
The bottom is that this means that if you only pay the minimum, you could be racking up 30% interest for months, even years.
If you can, charge this purchase to your credit card rather than taking out a cash advance. The interest rate you pay will be lower, and you’ll save a little bit of money.
If you have time, maybe you can even take advantage of an introductory APR purchase offer from a new card.
If you don’t have time to get a new card, or if you need cash right away, one way to get around the higher cash advance interest rate is to get cash back at a grocery store.
Make a small purchase (like a pack of gum), then withdraw the money you need. In most cases, you will be charged the regular purchase APR instead of the cash advance APR.
And if you do find yourself struggling to make the payments on credit card debt, you can then consider either taking advantage of a zero percent APR balance transfer offer or refinancing your debt with a credit card consolidation loan.