Part IV: A Loan? At What Cost?

The fourth type of loan that will be discussed will be the use of cash advances on your credit card. This is most definitely NOT the way to lower your credit card debt. The average interest rate on a cash advance on credit cards is 22%. This is up from the average of 19% just four years ago. Add the fees for 3%-5% of the advance amount, and the cost for the money is even higher.



In the past, these have had a double whammy effect. What would happen is this: If you had a purchases balance of $1,000 at 12% and a cash advance balance of $200 at 22%. When you sent in your monthly credit card payment (let's just say $100), your credit card company, in all their greed, would apply that to the purchases balance. Your $200 at 22% would continue to grow untouched until your purchase balance was at zero. If you continued to use your credit card for purchases, you may never get the cash advance portion to disappear.



It is very difficult to rid yourself of this type of balance.



The good news is that the credit card legislation that takes place in February 2010 will make the monthly payment that you send in apply to the highest interest rate balance portion first. Avoid cash advances if at all possible: borrow from your family or friends before you ever venture to whip out your credit card and get a cash advance.



Have a GREAT day!