In high school and college, few students receive lessons on how to manage their debt. Unless a student is pursuing a degree in finance, math, business, accounting, or economics, he/she will likely have very little exposure to handling debt, aside from a brief introduction to student loans at the onset of one’s college experience. While those in the aforementioned fields of study may be knowledgeable about credit debt and credit cash advances, the rest of the student body may need a little more schooling in the subject.
There are a few different types of cash advances: some are based on income, and thus mimic payday loans, some are based on collateral, similar to title loans or pawn shop loans, and then there are credit card advances. Because credit is familiar and widely used by college students, it is important for this demographic to understand how credit cash advances work.
A credit card cash advance is, as the name implies, an advance of cash from one’s line of credit: a card user can simply visit an ATM and withdraw cash from his/her credit card as if it were a debit card. Most credit cards allow these types of advances, at a cost. Unlike a debit withdraw, which is taken from available funds in one’s bank account without the accrual of interest, a credit advance is withdrawn from one’s available credit but with an extremely high interest rate. Because of the high interest rates associated with these advances, paying off the debt acquired from the advance can be very difficult.
College students who utilize credit cards will benefit by understanding when and how these advances can (or should) be used. Below is a list of dos and don’ts of credit card cash advances.
* Do check your credit limit, balance, interest rates, and fees prior to withdrawing an advance from any card. It is so important for card users to read their agreements, including the fine print. Often, creditors charge fees to withdraw cash and charge upwards of 30% interest on the advances, regardless of the regular purchase interest rate for the card. Also, there are also limits on the amount of cash that an individual can withdraw. It is imperative to know these limits, fees, and interest rates to avoid sticky financial situations.
* Don’t use these advances on frivolous purchases. What constitutes a frivolous purchase may vary from person to person, but it is fair to say that most would agree that a night on the town partying with friends is not a legitimate reason to withdraw cash from a credit card. Really ask yourself, is this purchase worth the interest? When in doubt, leave it out.
* Do attempt to use your card in the standard form, wherein you purchase an item directly with a credit card without an exchange of cash, prior to opting for an advance. Don’t jump to the conclusion that you have to have cash. Many places accept credit cards. Plan ahead to assure that your destination will allow standard credit card purchases.
* Don’t withdraw more than you can pay back the next month. Creditors apply payment to low interest, regular purchases before applying payment to high interest advances. Thus, do not withdraw more on a card than you can pay off the next month. And remember, in order to avoid interest, you must pay off the entire balance of the card.
By following these simple rules, college students can protect themselves against excessive cash advance debt.