What Happens Whan You Borrow Money on Credit Rather Than Using it on a Purchase?

Credit cards, tools of convenience used every day by millions of Americans, offer ease of use. They also offer perks, like cash back or points for purchases. However, although credit card cash advances offer the borrower tremendous purchase flexibility, the terms are stiff. Read your user agreement carefully before deciding whether or not to use your credit card at the ATM; it may cost more than it's worth.

Interest and Fees

The low interest rate prominently advertised by your credit card most likely does not apply to the cash advance feature. According to the Young Money website, average purchase percentage rates range from 15.88 to 17.30 percent; however, cash advances rates often range from 20 to 25 percent.

No problem, you say, I always pay my bill in full. Read the fine print: while there's typically a grace period on purchases, interest is charged on cash advances starting on the first day. In addition, there's usually a percentage fee charged by the lender to use the cash feature, and it can be as high as 4 percent. Combine that with no grace period and the fee the ATM charges, and you've racked up a lot in fees before the statement has even been printed.

Credit Limit Versus Cash Advance Limit

Borrowers should also note that the cash advance limit is typically a small percentage of the total credit limit. For example, if you have a $5,000 credit limit, you may only be able to access $1,000 in cash. Be wary of "convenience" checks sent by your credit card lender, too; they're considered cash advances and are subject to the higher fees and interest rates. You will only be able to cash a convenience check up to the available limit on your cash advance line, not your entire credit line.

Avoiding Cash Advances

The best way to avoid using the cash advance feature is to ignore the personal identification number the lender sends you after the account is opened. Shred convenience checks, too. Cash advance spending is addictive and is an easy way to get into serious credit trouble. If you need to consolidate bills, seek out a credit card with a balance transfer feature and low fees. Balance transfers may be used up to the entire credit line and may have low introductory interest rates. After you've transferred the balance, develop a plan to pay it off in full during the promotional period.

Your Credit Score

Although using the cash advance feature won't lower your credit score by itself, running a high balance on your credit cards every month will. Always keep your total balances to less than 50 percent of your available credit, and always pay your bill on time; these two actions, performed regularly, will give a boost to 65 percent of your credit score. Remember that if you don't have the cash to pay for an item, you probably won't have the cash to pay the bill when it arrives. If you must charge a purchase, having a plan to pay it back in advance will keep your credit score high and your borrowing costs low.