Credit Card Cash Advance Pitfalls
December 1, 2004
By: Curtis Arnold
Credit card cash advances can provide consumers with convenient and instant access to "cold cash" in times of financial need, but cash advances should be avoided if at all possible. Informed consumers realize that cash advances are typically accompanied by fees and exorbitant interest rates (there is also no grace period for cash advances). Moreover, cash advances can be a major stumbling block for consumers seeking debt relief. We hope the following tips help consumers avoid the pitfalls associated with cash advances.
* Fees for cash advances vary, but fees can be very costly. Fees are computed using two calculation methods. Many card issuers calculate fees on a percentage basis, which typically ranges from 1% to 4%. Other issuers charge "flat fees" for advances. "Flat fees" are not based on the amount of the advance and, therefore, are always the same.
An increasing trend is to combine both calculation methods. Combining calculation methods results in higher cash advance fees. An example of this would be an issuer that charges x% for an advance, but charges a minimum of $10 regardless of the amount of the advance. Another example would be an issuer that charges x% for an advance or $20, whichever is greater. Read the terms of your card agreement carefully. Fee calculation can get tricky.
A few issuers do not charge any fees at all. This is very rare, though. One such issuer is Pulaski Bank (featured card), located in Little Rock, Arkansas.
Finally, if you must get an advance, avoid using ATM machines. ATMs charge an additional fee for advances. This fee is charged by the financial institution that owns the ATM.
* Often the greatest potential pitfall for consumers who decide to get a cash advance involves finance or interest charges. The interest rate for cash advances is often several points higher than the normal purchase interest rate (the rate that is associated with everyday card purchases). Cash advance rates normally range from 20% to 25%. In contrast, the average purchase rate for a standard credit card ranges from 12.75% to 13.47%. However, a few issuers charge the same rate for both purchases and cash advances (see our Low Interest Credit Cards for more info.).
Other finance charge pitfalls involve grace periods and the payment method that a card issuer utilizes. Cash advances typically begin accruing interest immediately and, therefore, are not subject to a grace period. Thus, even if you pay your card balance in full when your bill arrives, you will still be accessed a finance charge for any advances. A similar pitfall involves the manner in which payments are applied to your account. Most issuers apply payments to card purchases before they apply payments to cash advances (i.e. payments are first applied to purchases). If you carry a balance on your card, this can result in a dramatic increase in your finance charges and overall interest rate.
* Please be aware that any "credit card checks" that you receive in the mail are usually treated as cash advances! Card issuers often tout such checks as an easy way to pay off the bill of your choice or to acquire some extra spending money. While using a check may be convenient, it can be extremely costly. Some balance transfer offers are also treated as cash advances.
* Dependency on cash advances can be an outward sign of serious debt problems. Consumers that regularly rely on advances to "make ends meet" urgently need debt counseling. Cash advances are so tempting that some cardholders fall victim to the "cash advance trap" and find themselves caught in a vicious cycle. If this statement applies to you or someone you know, please refer to our debt help blogs for helpful resources.
About the Author
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998.