debt

Credit card advance can haunt your future

Steve Bucciq_v2.gifDear Debt Adviser,
I have been paying my credit card monthly payment on time, but I'm paying it down rather than paying the whole card off. I just can't afford to pay the whole card off yet. I noticed that in every billing cycle, the statement keeps showing a "cash advance payment" charge, and I have since closed the account. But this cash advance payment shows up, and it feels like I make a step forward and get knocked back two to three steps because it pushes my balance back up when I'm trying to pay it down. Is there anything I can do to have this cash advance payment stop showing up month after month after month?
-- Jay

a_v2.gifDear Jay,
Some believe we have lived earlier lives in another time. Once in a while, memories from this earlier life come into our lives today. There is even a word for it: "deja vu." My cat Big Al was convinced he was once Alexander the Great, and sometimes he had me convinced too! It sounds as though you are facing interest charges from a previous life when you took out a cash advance using your credit card. It may have even been so long ago that you don't even remember why you needed the cash.

Current laws, rules and regulations allow credit card issuers to apply payments however they wish if you have balances at different interest rates on the same credit card. For example, most cards have one interest rate for purchases and a different, almost always higher, interest rate for cash advances. In addition, you may have yet another interest rate for a balance transferred from another credit card.

Your card issuer sees itself as being in the business to make money first and providing a service for the common good second. The result is that higher interest rates are charged for cash advances than purchases, but payments are applied to the lower interest rate balances first. This means that until you pay down all the lower interest rate balances on your statement, the cash advance interest rate charges will keep accruing and adding to your cash advance balance, generating an ever increasing balance at the higher rate.

Because you have already closed the account, you are not adding anything to your current lower interest rate balances, which is good. If you continue to make payments, eventually you will pay off the balances at lower interest rates. Once that is accomplished, your entire payment will apply only to your cash advance balance, and the balance will go down.

You can hasten this day by making payments to your account as soon as you have some extra money and not waiting for the account to accrue a full month's interest. Interim payments will reduce the number of days that the full balance is outstanding, and like paying an extra mortgage payment each year, they get you out from under this debt faster.

You also have a couple of other options. You could transfer the entire balance to another credit card where you would be paying the same interest rate on the full amount. If you take this option, don't make any purchases using the card as you will likely have to pay off the low interest rate transfer in full before your payments begin to apply to any higher rate new purchases. Be sure to read the fine print about transfer fees and for heaven's sake, don't take another cash advance with that card.

Another option is to transfer your current credit card balance to a fixed-term loan product such as a personal loan or a home equity loan or line. The thing to keep in mind with using home equity for secure, nonhome debt is to have a plan to pay it off as soon as possible.

Some good news for your next life is that the Credit CARD Act of 2009 has been passed and will become effective in February 2010. The act includes provisions that require a fair allocation of payments to all balances regardless of the interest rates charged.

Good luck!

Read more Debt Adviser columns and more stories about debt management.

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of "Credit Repair Kit for Dummies." To ask a question of the Debt Adviser go to the "Ask the Experts" page.

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