You’ve probably seen them crowding your mailbox.
Crisp checks sent over by your credit card company are marketed as a “convenient” way for you for pay bills, consolidate debt and access more of your available credit. To the untrained consumer, it might seem no different than any other credit card purchase.
But the price of tapping credit through a cash advance, which lets people borrow from their credit cards by writing a check or withdrawing money from an ATM, is much steeper than it would be for a traditional credit purchase. It’s also much harder to avoid fees when a cash advance is involved.
Here’s the biggest difference: Consumers who pay off their regular credit card purchases in full each month before the bill is due can avoid all interest charges. People who take out cash advances, however, incur interest charges immediately, says Matt Schulz, a senior analyst for CreditCards.com.
Card users may face a cash advance fee the moment they request the cash advance, typically amounting to 5 percent of the advance, or $10, whichever is greater, according to a report released Wednesday by CreditCards.com.
The interest rates charged on cash advances are also typically much higher than what a person might normally be paying, Schulz says. Rates on cash advances average 24 percent, higher than the average 15 percent charged on standard credit card purchases, the study found.
Some people might turn to cash advances if they need a short-term loan to cover some bills before pay day, Schulz says. Depending on the size of the advance and how long they’ll take to pay it off, some people might pay more for the advance than they would for an overdraft fee.
Take a $1,000 advance, which could cost $69 even if it’s paid off in the first month after $50 for the typical advance fee and about $19 in interest charges, Schulz estimates. That’s almost double the typical $35 overdraft fee. However, a smaller cash advance of a few hundred dollars that is paid off in just a few days may be less costly than facing an overdraft on the account, he says.
Paying off the advances can take a while. People who want to make progress on their cash advance need to make more than the minimum payment, since credit card issuers will apply that minimum to the debt with the lowest APR. Any extra payments can go toward the higher-cost debt.
Credit card issuers are generally cutting down on the number of cash advance offers they send out, Schulz says. But people who want to stop receiving the offers altogether should call their credit card issuers and ask to be taken off the mailing list.
If you are going to use a cash advance, keep the loan low and pay it back as quickly as possible, Schulz says.
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