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Hidden Costs of a Cash Advance

Article Summary: As well as making purchases, credit cards offer the added convenience of instant access to cash via ATM's worldwide. However, the convenience may come with a cost so find out what you need to know about 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's no question about it, credit card cash advances can act as a very valuable feature. Anyone travelling overseas and stuck for cash will be grateful of the lifeline is provides. Your credit card allows you to get a cash advance anywhere around the world, from locations as convenient as the ubiquitous ATM machine.

Before you start making credit card cash advances there are things you need to know. Typically, cash advances are going to be more expensive to you than making the purchase directly on your credit card. Consider the following:

Finance charge: There are cards that bend the rules but you will find a cash advance with most cards attract a higher APR than purchase rates. This is very typical even with low interest credit cards. For example, a low interest credit card from an Australian bank has a cash advance rate of 18.75 percent (as at March 12, 2008), while the purchase rate is 12.99 percent. Be aware that the difference in interest rates can be very 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.

Article Source: http://www.upublish.info

About the Author:
Richard Greenwood
Richard Greenwood is Founder of Click4Credit which compares Visa Credit Cards and Mastercard offers online from Australian banks.