Consider your credit card. It's a great tool, isn't it? With it, you can purchase things you want or need even though you can't yet afford to pay for them. It's more secure than checks or cash, and even if you're far from home, you can still use it. Some credit cards even have rewards attached, and there are cards for every situation -- credit cards for people with no credit history, cards for people with bad credit, even for people with bad credit scores. But just as with any other tool, you need to treat your credit card with care. If you use it badly, it will affect your credit report and score and raise your interest rates. One of the most essential things to know: when to take cash advances. Many cards offer very large amounts of cash, so it's very tempting to use it! There are two ways to get cash off your credit card. One is to use the document that looks like a check that arrives with your bill every month; the other is to simply go to an ATM and use it like a debit card. Credit card companies report that cash advances are on the rise; one said its members advanced more than $104 billion last year, which was an increase of 8 percent over the year before! It's clear that card members are finding how simple it is to get cash from their credit cards. Naturally, the credit card companies are delighted to "help" their customers. They take a huge profit on cash advances, because in nearly every situation, the interest rate on advances is substantially greater than the normal rate on regular purchases. Your monthly statement has lines and lines of tiny print explaining how the charges are determined, but it's terribly complicated. If you're not sure how much you're being charged, call the 1-800 number to get some answers from a customer service representative. If you're taking a cash loan — which is what a cash advance is — you should know precisely what the terms are. Don't let your cash advances ruin your credit score! When you use your credit to purchase a product, you usually have something physical to show for it — a pair of pants, a cart of groceries, or a trip somewhere. But if you're using your credit card as if it were an ATM card, taking out money to use as cash as you go through the day, it's convenient, but you'll end up paying a lot for that convenience. You should pay it back ASAP, because the longer it's on your monthly statement, the greater the interest charges will be. For example: One credit card firm charges 4% immediately as a "transaction fee," meaning that if you withdraw $400, that's $16 more you have to pay back, and that's just for starters! The actual interest rate on cash advances at this company -- and this is typical — is 18.9%. Assume you're able to pay back the $400 within six months. You end up paying more than $60 on top of the actual $400 -- and that's if you pay it back in six months! If you let it drag out for longer than that (which many people do), it will be even more, and your credit score is going down all the time. Naturally, the credit card firms make it as hard as possible for you to pay back the high-interest cash advances. They want you to drag it out as long as possible. When you make your monthly payment, the money goes to the lowest interest rate purchases first. If there's something left over, then that will go to the cash advances. So let's say, for example, you owe $2,000 — $1,500 in purchases, $500 on cash advances. If you pay $100 each month, it will be 15 months before you even START paying back the cash advance — and the cash advance is racking up more and more interest charges all the while. By the time you get to it, the $500 will have ballooned to something like $700. So why do the credit card companies charge higher interest rates on cash advances than they do on regular purchases? Because they can. People pay the fees, so why change? Of course, they justify it by pointing out that the customers most likely to use cash advances are also the ones most likely to skip payments and get behind, making them greater risks. If you find it necessary to get a cash advance from your credit card, you should come up with a plan of action beforehand. Determine in advance when you'll be paying it off. Study the fine print in your credit card policy so you know exactly how the charges, fees, and laws work. After you get the cash advance, you might consider transferring the balance to a different credit card, one with a lower interest rate. So can cash advances actually help your financial situation at all? Not usually. Any credit counselor would point out that you need to become disciplined in the way you spend money, and to save for emergencies better. If you're taking cash advances all the time, that's a good indication that your financial situation needs some work. It might be an alert that you should reassess things. Take a good look at your financial situation and make some changes, lest your credit score be damaged.
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