Cash-strapped Australians started withdrawing money from their credit cards en masse just before Omicron struck late last year, alarming financial experts.
Reserve Bank data released on Wednesday revealed Australians took more than one million cash advances on their personal credit cards last November, just after Delta’s lockdowns in New Wales eased. South and Victoria.
Hardline Wealth director and partner Cody Harmon is alarmed by the numbers, saying he was surprised so many Australians were looking for cash given the growing popularity of cashless payments during COVID-19.
The value of personal credit card purchases also hit $ 23.6 billion in November, but cash advances totaled more than $ 400 million in the same month.
The risks of using a cash advance
Mr Harmon said cash advances can be risky, even if you’re at a dead end, and are “not generally recommended” by experts.
That’s because withdrawing money from your credit card further adds to your debt and, according to Canstar chief spokesperson Steve Mickenbecker, will likely end up costing you more than regular credit card purchases. .
If you use cash advances, Mr Mickenbecker said you need to be aware that you will be paying a “fairly high” purchase rate (an interest rate applied to regular purchases made with a credit card).
He said that, according to Canstar’s database, the average purchase rate for credit card is 16.88 percent, while the average purchase rate for cash advances is much higher by 19. , 33 percent.
If you use an ATM to get your cash advance, he said you might also be required to pay a one-time fee of up to $ 5, but the biggest concern is the interest rate.
Mr Mickenbecker said resorting to the “bad habit” of using cash advances could leave you with thousands of dollars in debt.
“If you think of an accumulated $ 3,000 debt, well, $ 600 of that amount is just interest for one year,” he said.
“It becomes difficult to move stubborn credit card debt and you find that you risk getting into a bad spiral where you really work for the bank. “
Tips before embarking on a cash advance
Mr Mickenbecker said taking a cash advance should be ‘close to last resort’ but gave his best advice on what to consider before moving forward:
- Ask yourself: am I going to use the money for the expenses I actually have to incur? If you plan to use the money for discretionary spending, consider whether you should avoid spending the money if you can’t afford it right now.
- Make sure your credit card has a low interest rate because you will be paying higher interest than your cash rate card. Consider changing your card to save money.
- Pay off your debt as quickly as possible when you’re back on your feet to avoid accumulating more debt.
What are the alternatives ?
Given the high interest rates and fees associated with cash advances, Harmon said it would be better to get a personal loan or consider peer-to-peer loans.
“We’ve all been in the financially injured locker,” he said.
“I started a business and ran out of money, so I kind of understand that some people are in a bind.
“And when they are, [they should] seek more flexible peer-to-peer lending solutions that provide much, much easier access to credit for individuals without as much underwriting and more favorable terms and flexibility. “
Peer-to-peer loans have traditionally made it easier to match borrowers and lenders or investors on online platforms.
The money lent comes from informed investors, professional investors or the general public.
Mr. Harmon said that this way you can quickly get the money you need to pay off your credit card debt.
This could leave you with a five-year personal loan at a lower interest rate as opposed to a high interest rate on a cash advance, which gets worse against you.
Mr Harmon said it is important to get rid of your credit card debt as soon as possible, especially since inflation is expected to rise this year.
“It’s very important to get your cash flow under control and try to reduce your debt now,” Mr. Harmon said.
“Because how do we control inflation? Usually we raise interest rates.
“And so those who are in debt in an inflationary scenario are usually punished.”