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Cost of cash advances

Q. How do cash advances from a credit card work?

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 percent 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.

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"Using cash advances is like borrowing money when you can't afford it," says Steve Rhode, president and co-founder of Myvesta.org, a nonprofit group providing help for difficult financial problems. "You're setting yourself up for failure. It's convenient, and people don't care about the fees associated with it."

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.

Card issuers say they have two reasons to charge the additional fees. Cash transactions cost more to process than regular credit card purchases, and there's a higher frequency of default among frequent cash-advance users. The higher costs and increased delinquency risk are passed along to the consumer.

To learn more about the sting of cash advances, check out this story.


-- Posted: Aug. 14, 2002




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