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Credit Card Cash Advances

By Richard Greenwood

Republish: EasyPublish™
Published: 17Apr2008
Word count: 529
Viewed: 271 time(s)

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There may be times when you feel the need for some hard currency and all you have in your pocket is loose change and your credit card. No problem, you can always use your credit card to obtain a cash advance. At other times, card issuers may even send you a subtle invitation to make a cash advance. The invitation comes as a convenience or credit card check, and if you do use the check, the amount you write is treated as a cash advance. This could be useful if, for example, the shopkeeper refuses to accept credit card.

Should you be concerned about that?

There is no doubt that credit card cash advances provide a real service. Any traveler who finds himself or herself wanting for cash in a foreign country will really appreciate the relief it gives. Your credit card allows you to get a cash advance anywhere around the world, from locations as convenient as the ubiquitous ATM machine.

But, yes, there are things you should know about credit card cash advances. Generally, a cash advance will cost you more than the purchases you charge on your credit card. Consider the following:

Finance charge: There may be some exceptions, but cash advance usually attracts a higher interest rate than the rate applied on your purchases. This is a common feature and can be found even among low interest credit cards. In Australia, for example, one issuer set the cash advance interest rate on its low interest credit card is set at 18.75 percent (as at March 12, 2008), while the purchase rate is 12.99 percent. The point is the interest rate difference can be quite significant.

There is a reason for this. The credit card issuer earns some income from your purchases because merchants pay fees to process and receive payments for the transactions. A merchant is not involved in a cash advance transaction, so the credit card issuer does not earn fees.

Grace period: Credit card issuers normally grant a grace period on purchases, and charge interest on these only if you don't pay off the amount when it falls due. A cash advance does not get such grace period, and interest is charged from day one. A $500 credit card purchase could cost nothing in interest if you paid the bill in full on its due date; a $500 cash advance at 18 percent APR paid in full after one month would require you to pay $7.50 interest.

Special fee: Banks normally impose a transaction fee on cash advances, expressed as a certain percentage of the cash advance amount. Usually, the fee ranges from 2 to 3 percent, but with a minimum fee (e.g. $10). In the example above, you would pay $10-$15 (2-3 percent) as transaction fee on the $500 cash advance.

In the examples above, the $500 credit purchase would not cost anything in interest or fees, but the $500 cash advance would cost a total of $17.50-$22.50.

That is the bottom line: credit card cash advances are more expensive than credit purchases. The message is that cash advances should be used judiciously and only in emergency situations.

Richard Greenwood is Director of www.click4credit.com.au which compares low interest credit card offers and provides tips on getting a new card.

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