Understanding and Managing Cash Advances: A Comprehensive Guide

At O1ne Mortgage, we understand that financial emergencies can arise unexpectedly, and sometimes you might consider a cash advance to get through a tough spot. However, it’s crucial to understand the implications and alternatives before opting for this financial solution. In this blog, we’ll explore how to manage cash advances effectively and provide tips to avoid them. If you need personalized mortgage services, don’t hesitate to call us at 213-732-3074.

Can You Pay Off a Cash Advance Immediately?

Yes, you can pay off a cash advance as soon as it posts to your account. However, it’s important to note that many credit cards charge a cash advance fee, which can range from 3% to 5% of the amount borrowed. Additionally, interest on cash advances often starts accruing daily from the transaction date, leading to a larger balance if not paid off quickly.

For instance, if you take a $500 cash advance with a 5% fee, your balance will be $525. With an annual percentage rate (APR) of 30%, the daily interest rate would be approximately 0.082%. This means you could accrue about $4.31 in interest on the first day alone, and around $130 over the first month if the balance remains unpaid.

How to Pay Off a Cash Advance

Paying off a cash advance involves making a credit card payment as you normally would. However, you generally can’t specify which transactions your payment should cover. Credit card issuers apply payments based on a set of rules outlined in the card’s terms and conditions.

To fully cover your cash advance, your payment should include the current statement’s minimum payment, the cash advance amount, and any related fees and interest. This ensures that the cash advance balance is paid off promptly, minimizing the interest accrued.

Are Payments Applied to Purchases or Cash Advances First?

Typically, credit card issuers prioritize paying off the cash advance balance before purchases because cash advances usually have higher interest rates. However, the exact application of payments can vary:

• Installment Plans: Some credit cards offer installment plans for certain purchases with fixed monthly payments. Payments may be applied to these plans first.
• Minimum Payment: The minimum payment amount is often applied to the balance with the lowest APR first.
• Highest APR Balance: Any amount paid beyond the minimum payment is generally applied to the balance with the highest APR first.

How to Avoid Cash Advances

While a cash advance can provide quick cash in emergencies, it is generally not advisable due to the associated fees and high interest rates. Here are some alternatives to consider:

• Use Your Savings: Dipping into your savings or emergency fund can be a more cost-effective solution than paying cash advance fees and interest.
• Borrow from Friends or Family: If you need a small amount of money and can repay it quickly, consider asking a friend or family member for a loan. You can even use payment apps like Venmo or Cash App to repay them immediately.
• Get a Personal Loan: Personal loans often have lower interest rates compared to cash advances. Although it may take a few days to process, online lenders offer quick and simple applications.

Accidental cash advances can also occur, such as using a credit card to send money on a payment app or purchasing cash-like products like cryptocurrency. To avoid this, carefully read the confirmation text of money transfers between your bank accounts before confirming the transfer.

Preventing Accidental Cash Advances

To avoid accidental cash advances, consider lowering your card’s cash advance limit. You can call your card issuer or log in to your account to disable cash advances or set the limit to $0. This precaution can prevent accidental cash advances or unauthorized use of your card.

If you accidentally use a cash advance, monitor your account for another month or two, even if you pay off the balance immediately. Residual interest from the cash advance may need to be paid off in the next billing cycle.

Improve Your Credit to Increase Your Options

Even if you can’t pay off the entire cash advance quickly, making early payments can reduce the amount of interest accrued and save you money. Additionally, improving your credit score can provide access to credit cards and loans with better rates and terms. If you’re unsure about your current credit status, check your FICO® Score for free from Experian and use your Experian account to monitor your credit report and score.

At O1ne Mortgage, we are committed to helping you navigate your financial journey. For any mortgage service needs, call us at 213-732-3074. Our team of experts is here to provide you with the best solutions tailored to your unique situation.