Last year I borrowed a $3,000 cash advance from my credit card. I’ve now paid over $800 in interest on this loan yet haven’t paid down the principal balance by one single dime.

My card charges a cash advance rate of 24.9% while my rate on purchases is a less shocking 14.9%. Though I pay more than the minimum due each month and am making steady progress in paying down my debts, my card’s terms dictate that payments are applied to the *lowest* rate portion of my balance first. Only when that is paid off will I start whittling down the burdensome cash advance portion of my balance. I think it will take me another year — and another $800 in interest — to get to this point. (Ironically, though my balance and interest costs are steadily declining, this payment scheme actually causes my effective interest rate to GO UP each and every month!)

Congress has taken notice of how onerous this on on consumers and passed the Credit Card Holders’ Bill of Rights this past April. When in takes effect on July 1, 2010 banks will have to either apply payments to the highest rate portion of your balance or prorate your payment proportionally across all of your balances. This may provide me with a small bit of relief, though the bigger lesson learned is that this is a costly situation I should have striven harder to avoid.

When I took the cash advance out, I felt that I desperately needed the money. Now that I know how high the cost of these funds has become, I should have taken a hard look at what I needed the money for and whether it was really a ‘must have’. I also should have evaluated the costs of making late payments on the bills I had due at that time versus the nearly $2,000 I will ultimately spend for a $3,000 loan. Though late fees certainly seemed like a painful blow at that time, they pale in comparison to what I’m paying to avoid them.

Finally, if I had no choice but to take out a cash advance, I should have used a credit card that I could devote solely to this purpose. This would have allowed me to focus my repayment efforts on this high rate loan and every dollar of principal repayment would have immediately brought my balance down, instead of chipping away at the lower cost purchase balance and costing me a fortune.