Credit Card Cash Advances

Credit Card Cash Advances
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
http://www.click4credit.com.au where users can compare
credit card offers and apply online.