If you have a credit card, you probably get them periodically — those so-called “convenience checks” that are also referred to as “balance transfer” checks.
But many card holders may not realize that these checks amount to a cash advance, and they carry potentially high fees and interest rates.
Creditcards.com reviewed 100 cards on its site and found that 98 charged for a cash advance, and most often the fee was 5 percent of the amount, or $10, whichever is more.
Unlike a regular credit card purchase, interest on cash advances, or those “convenient checks,” usually starts accruing right after the transaction. Given that the average interest rate on an advance is 24 percent, a steeper rate than what’s usually attached to a standard purchase (about 15 percent nationally, on average) consumers can end up owing more than they thought.
“I think that people generally understand that the cash advance is kind of a different animal than your standard credit card purchase, I just don’t know that they know fully all the details,” said Matt Schulz, senior industry analyst for CreditCards.com.
As USA Today points out: a $1,000 cash advance would cost an extra $69 — even if paid off in 30 days because of the fee and interest beginning to accrue immediately. In sharp contrast, a standard credit card purchase of $1,000 would not accrue any interest if paid off within that same month-long period.
Schulz says that a credit card user who only pays the minimum amount due every month may not make much headway in paying off a cash advance. That’s because the federal Credit CARD Act enacted five years ago directs card issuers to configure the monthly minimum payment to the balance that carries the lower-interest rate. That means that the higher-interest cash advance won’t be a priority.
“The longer you let those high interest rate balances continue to grow, the harder and harder it will be to eventually get rid of that debt,” Schulz tells USA Today.
Despite the costs, a cash advance may sometimes be necessary, Schulz concedes, and it can be less costly than a payday loan, or in some cases, even an overdraft.
“When you boil it all down, what people need to know is that cash advances can be the best of a bunch of really bad options when times get tough,” he said.