So, many people use credit cards for their day-to-day purchases. But wait for it-you also can take an actual loan out against your credit card! I know that sounds a little wild, but it’s completely possible. Just make sure you understand how it works and what risks are involved first.
So, what’s a credit card loan? So, a credit card loan, which basically means an advance of cash, lets you borrow money up to your credit limit. When you go for that cash advance using your credit card, it’s just like pulling straight from your available credit. It is not similar to when you simply use your card to buy stuff. Instead of the cool gadget, you’re walking away with cash in your pocket.
You can pull this cash out of an ATM, or sometimes your bank can simply toss it directly into your account.
How Do You Take Out an Advance With Your Credit Card?
Generally, to take out credit using your credit card, you will find that you have two major avenues:
Cash Advance at an ATM: So, most credit cards let you snag a cash advance at an ATM. You’ll need your credit card PIN for that, though. It’s super easy—kind of like taking out cash from your checking or savings account. But instead of dipping into your bank balance, you’re actually borrowing money from your credit card company.
Bank Transfer: Well, a few credit card companies have this cool thing where they are able to shoot cash directly into your bank account. You can use that money however you want. They usually call it a “convenience check” or a direct deposit loan. The credit card company may very well send you checks you can fill out and deposit just like any regular check. In this manner, you may draw on your credit line without having to hit up an ATM.
Charged and Interest Rates
Getting credit via a credit card is pretty easy, but it does cost. One of the most significant drawbacks has to be those exceedingly high interest rates. If you’re obtaining a cash advance, the rate is generally much higher than what you will have to pay for regular stuff. It may hit anywhere from 20% to 30% or even more depending upon your card.
So, basically, the moment you get a cash advance, it starts charging interest right away. Unlike usual purchases, there’s no grace period. In simple words, the minute you pick up the loan, that interest begins to amass itself. So, if you don’t pay it back soon, that loan can become very expensive in no time.
Besides those high interest rates, you’ve typically got fees to go along with them, too. Most credit card companies charge a cash advance fee. This is generally a percentage of what you borrow-3% to 5% or so. That means if you take out a $1,000 cash advance, you could have paid a fee ranging from $30 to $50. Other cards have a minimum fee, even if you are taking out only a little-which could be well above $10.
How Your Credit Score Gets Affected
So, if you take an advance with your credit card, it can drain your credit score. That’s because a cash advance increases your credit utilization ratio. This refers to how much of the credit available to you is being utilized. The higher it is, the worse it can be for your credit score. Experts say it’s best to keep your credit utilization below 30% of your limit to avoid any adverse effect on your score.
Hey, you know what? Taking out a cash advance can totally send the wrong message to lenders, like that you’re in some financial hot water. If you keep going for cash advances, it kinda looks like you’re having a tough time keeping your finances in check. That could make it trickier to snag loans or credit down the line.
When Should You Use Credit Card Loan?
Taking a credit card loan isn’t always the smartest thing in the world. However, sometimes it can pay off. Here are a few examples:
Emergency situations: If you find yourself in a jam and in need of cash quickly, this loan with a credit card is the way out. Keep in mind having a way to pay it back quickly so you don’t drown yourself in high interest fees.
No Other Options: So, if you’ve tried every other way to get cash, like digging into your personal savings, and you really need money fast, a credit card loan could be your quick fix. But seriously, those high costs mean it should be your last choice.
Short-term needs: If you are positive that you are able to return the loan in a very short time, then a credit card loan will be very helpful. Just make sure to crunch the numbers and see if it’s actually worth it.
Options Other than Credit Card Loans
Before you borrow using your credit card, consider whether there may be a cheaper way to obtain credit. Other options might include:
Personal Loans: In this respect, personal loans are usually offered by either a bank or a credit union with superior interest rates than cash advances on a credit card. You might be able to qualify for a low-rate loan if your credit is looking good, thus saving you some money.
If you’re in a bind, asking a friend or family member for a loan could be a good move. Just make sure you both agree on how and when you’ll pay them back so you don’t mess things up between you.
Using a Low-Interest Credit Card: If you have a credit card with a lower interest rate, you may want to use that one. Some even offer you promotional rates on balance transfers or cash advances for saving money.
Selling unused items: In case you have items that are no longer in use, you can sell them to raise cash. This may be a faster way of getting money without sinking into debt.
Final Thoughts
So, it is quite possible to take out a loan using your credit card, but it’s pretty risky. The interest rates and fees are really high, which could make borrowing money pretty costly. It can also hurt your credit score, which might cause problems later.
Before jumping into a credit card loan, weigh the pros and cons. See if you have any less expensive options. If you must take out a credit card loan, make sure you have a plan to quickly pay off your balance to avoid paying more than you have to. Always use credit responsibly to avoid money problems.
If you are unsure, it may be advisable to consult with a financial advisor or credit counselor. They could best help you explore your options and find the most suitable solution for your situation.