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That $300 cash advance you just
put on your credit card could end up costing you a lot more in fees.
Many consumers are unaware that every time they
use their credit cards to withdraw cash, extra fees kick in:
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About cash advances |
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Cash advances carry an upfront fee of 2
to 4 percent of the amount advanced. |
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They have a higher interest rate than regular
card charges. |
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They carry no grace period; interest charges
begin to mount as soon as the money spits out of the ATM. |
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Many issuers also require you to pay down
the balances for purchases before you pay down the higher-interest
cash advance balance. |
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"Using cash advances is like borrowing money
when you can't afford it," says Steve Rhode, the co-founder
of Myvesta,
a nonprofit debt-counseling service. "You're setting yourself up
for failure. It's convenient, and people don't care about the fees
associated with it."
Your costs will vary
Because credit card issuers are private businesses, they
set their own standards and fees according to marketplace competition,
internal strategies and the states that govern them. The fees also
vary by your credit history and the type of card you have, so even
within the same lending institution, there may be different fees
and rates that apply for various cards.
"It's a convenience that we're providing," said
Judy Tencer, a spokeswoman with American
Express, whose "Express Cash" carries a 3 percent fee. "We're
not a bank, so there is a fee associated with making the service
available to customers just like with ATMs or other conveniences."
Most of the nation's credit card issuers offer
cash advance features -- and people are using them. Visa,
the largest credit card brand, reported an increase in cash advance
activity of 8.1 percent between March of 2002 and 2003. The money
withdrawn by Visa cardholders as cash advances rose from $98.4 billion
to 104.3 billion.
Out in the open
The fees and charges applied to cash advances are not hidden
fees. By law, card issuers are required to disclose information
about fees and charges associated with all of their services. This
information is typically displayed on the back of the solicitation
form and on the monthly statements.
"Our philosophy is that consumers should know
all the terms when they are solicited so we try to provide a full
discussion of terms during solicitation," says David Webster, first
vice president of corporate affairs for First
USA, one of the largest credit card issuers. "When people use
a credit card for a purchase or a cash advance, they know they are
using credit. It's not their money; it's a loan from the bank."
Card issuers say they have two reasons to charge
the additional fees. There is a greater cost to process cash transactions
than to process regular credit card purchases, and there's a higher
frequency of default among frequent cash-advance users. The higher
costs and increased delinquency risk is passed along to the consumer.
Consumers are accustomed to knowing that certain
transactions and services come with a fee, Tencer says. When using
a cash advance, they are aware of the fees and they make adjustments
accordingly.
An unpleasant surprise
But some people don't read their credit card agreements carefully
-- if at all.
"Plastic is not the problem. People are the problem,"
Rhode says. "You can make the small print as large as you want,
but the problem is that people don't want to read it. That way,
they won't have to take responsibility for their spending."
Cash advances -- made directly from the ATM
machine or through "convenience checks" -- were designed for people
to use when paying by credit is not an option, says Visa spokeswoman
Erika Dill. They were not designed for people to use frequently
without having a method of quickly repaying the money.
Most stay ahead
Dill says 97 percent of credit cardholders are in good
standing with their card companies, pay on time and keep a low balance.
The other 3 percent are in over their heads, she says. "For every
three who are misusing the service, there are 97 who are using it
wisely. It's not fair to discontinue the service just because of
the small percentage of those who misuse it."
To avoid getting in over your head, credit counselors
recommend that you not only read the agreement carefully, but ask
questions if you don't understand the terms. If you cannot get the
answers you desire, then continue shopping around for a better,
easier-to-understand card issuer.
Before taking a cash advance, ask yourself if
it's really necessary, says Rupe. "If you're using it to float a
bill, buy groceries or to replace income, then there's a big problem.
You need to see a credit counselor."
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