It seems like a great idea: Pop your credit card into any standard ATM, and you can get hundreds of dollars of cash to use on whatever you need — cash that didn’t come from your bank account. But take a closer look, and you’ll find that credit card cash advances are a debt rip-off.

Debt is never a good thing: No matter how you try to manage it, carrying debt always costs you money and restricts your financial freedom. Credit cards can be pretty convenient these days, and it’s fine to carry one as long as you don’t spend more than you can afford to pay off at the end of the month. But if you take out a cash advance on your credit card, it’s going to cost you big-time.

In this series on Debt Rip-Offs, we’re investigating some of the ways that lenders take borrowers for a ride and squeeze them for a ton of money. Last time we took a look at Fingerhut.com (which offers expensive debt on overpriced consumer products). Today, we’re going to talk about how credit card cash advances are more expensive than they’re worth.

There are two ways to use most credit cards. One is the method that you use all the time — you swipe the card at the register when shopping with merchants. But credit card companies also allow you to take your card to an ATM and use them to withdraw cash. Instead of this money coming out of your bank account (like it would with a debit card), the money is borrowed from your credit card company. This is called a cash advance, and most credit cards allow cash advances of several hundred dollars.

This seems like a convenient way to get cash quickly when you need it, but cash advances are a bad idea. Although they’re not as terrible as payday lenders, these cash advances are very expensive — much more expensive than normal credit card transactions. Here are four ways that cash advances get very expensive, very fast:

1) Credit Card Fees

When you use a credit card to make a standard purchase, the merchant that you’re buying from pays a little bit of money to the credit card company as a processing fee — usually a few percent of your purchase. When you get a cash advance, though, there’s no merchant involved, which means that the processing fee comes from you. Some credit card companies base their cash advance fees on percentages, charging you a fee of 3% or more of the cash you borrowed. In this scenario, borrowing $500 costs you $15 in fees. Other companies use flat fees, charging $10-20 per advance. Either way, this is a very expensive way to acquire money.

2) ATM Fees

There was a time when you could withdraw money from an ATM for little or no money. But in today’s economic environment, banks are looking to ATM fees to produce more and more revenue, so it’s not uncommon for banks to charge $3 or more for each ATM withdrawal. Your home bank may not charge you to use their debit card in their ATM, but if you use a credit card in that same machine, they’re going to hit you with the full out-of-network charge. Stack that fee on top of the fee that the credit card company is charging you, and things start getting expensive. But we haven’t even got to the big stuff yet. Worse than fees are the….

3) Interest Rates

You may have a decent interest rate for purchases on your credit card (although interest rates vary widely based on the cardholder’s creditworthiness). What you may not know, though, is that your normal interest rate doesn’t apply to cash advances. Cash advances have their own interest rates, and they’re always higher than the normal rate — up to 7% higher. If your interest rate on purchases is 8%, the interest rate on cash advances can be 15%. This makes cash advances very expensive. And the longer it takes you to pay back, the more expensive the advance becomes, because the unpaid balance of the loan will accumulate interest at this higher rate until the entire sum — principle and interest — are entire paid off.

4) No Grace Period

When you make a $20 purchase on your credit card at the beginning of the month, that purchase shows up a few weeks later on your credit card statement. You pay that $20 to the credit card company at the end of the month, and your balance is paid off. We don’t often think about this, but there is a lag between when the credit card company paid the merchant $20 and when they got the money from you. That lag is called a “grace period” — it’s the amount of time that you have to pay off a charge before the credit card company starts charging you interest. Most grace periods are 30 days, giving you time to pay off a month’s purchases before they start incurring interest. But for most cash advances, there is no grace period: Your cash advance begins incurring interest on the day that you withdraw the money, even though it may not show up on your statement for several more weeks. And the interest is building up at that super-high rate.

By the way, do you ever get mail from your credit card company that has blank checks inside? Those checks work just like cash advances — if you use one of those checks they send you, you get hit with all of the same cash advance penalties and interest.

I hope you see how all of the fees and high interest rates of cash advances add up to create a very expensive situation. Cash advances are a debt rip-off that will do you much more harm than good in the long run. Do yourself a favor and avoid the need to borrow cash quick by building a solid emergency fund. After all, using your own money doesn’t cost anything in fees and interest.

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Photo by Tax Credits. Used under Creative Commons License.