|
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:
- Cash advances carry an upfront fee of
2 to 4 percent of the amount advanced.
- They have a higher interest rate than
regular card charges.
- They carry no grace period; interest
charges begin to mount as soon as the money spits out of the
ATM.
- Many issuers also require you to pay
down the balances for purchases before you pay down the higher-interest
cash advance balance.
"Using cash advances is like borrowing money
when you can't afford it," says Steve Rhode, money coach and
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.
Most of the nation's credit card issuers offer cash advance
features.
"It's a convenience that we're providing,"
said Judy Tenzer, 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."
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, senior vice president of business affairs for Chase
Card Services. "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, Tenzer 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 --
not for people to use without having a way to quickly repay.
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 Rhode.. "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."
|
