Using your credit card to draw cash at an ATM or writing one of those handy checks that comes in your monthly card statement can cost you plenty: typically around 24% annual interest, which is 6 percentage points more than the average interest rate cardholders pay on purchases.
Oh, and don't forget the typical 5% fee that card companies charge for a cash advance.
Those figures are drawn from a new CreditCards.com survey of cash-advance rates and fees on 100 top cards, the first look of its kind at this widely available but costly credit card loan product. Its findings help support the advice of credit counselors, who say that cash advances should be used only when consumers exhaust other, less costly options. Unlike using cards for purchases -- which offer an interest-free grace period if you pay off your statement in full and on time -- interest on cash advances starts immediately, so costs can balloon if the debt is not repaid quickly.
The CreditCards.com survey also found:
- Cash-advance interest rates ranged from 9.99% (on three cards from federal credit unions) to 36% (First Premier Bank Gold MasterCard). The median interest rate on cash advances was 24.24%.
- The median difference between interest rates on purchases versus cash advances was 6 percentage points. Seven cards generously offered the same rates on purchases as cash advances. On the other end, two cards charged interest rates a full 11 points higher for cash advances than for purchases.
- On fees, most cards charge 3% to 5% for a cash advance, with a $10 minimum charge.
To conduct the survey, CreditCards.com reviewed the cash advance policies of 100 of the most popular and nationally available general purpose credit cards.
Rarely used, but fees rising
Overall, cash advances are a seldom-used feature of credit cards. According to an October 2013 report by the Consumer Financial Protection Bureau, just 3.1% of active credit card accounts took cash advances in a three-month period at the end of 2012, down from 4% four years earlier.
The report also found that cardholders are taking cash advances less often and in smaller amounts than they used to. However, cash advance fees rose to an average of 4.9%.
Credit counselors generally frown on taking cash advances to pay ordinary expenses, and consumers tend to use them when they have few other options. Financially, it is almost always better to pay a merchant with a credit card or to use existing funds from a checking account before drawing on a cash advance and incurring the associated fees and high interest charges. But there are some circumstances in which using a cash advance could be understandable, especially in emergencies.
Rich Van Rooyen, a 42-year-old software developer in Stratford, Ontario, says he took out a cash advance only once in his life. He and his wife Jana were driving in a remote section of Canada nearly 20 years ago when his Ford Escort hit a crevice in the road, blew out the two passenger-side tires and damaged the rims.
Fresh out of college, he had little money and no credit cards to pay the $1,200 repair costs. Jana only had a Discover card, which was not widely accepted in Canada. The couple found a nearby Sears store and was able to take a cash advance to cover the costs. Van Rooyen says he repaid it quickly.
"This was a last resort," he says. "There was no other money. There was no other way. It was an act of desperation."
Why the high rates?
Banks say they charge higher rates for cash advances than for purchases because cash advances reflect a higher risk of not being repaid. In addition, banks routinely set a lower limit for cash advance withdrawals than the overall credit limit on their cards.
Darrin Graham, vice president of marketing with Premier Bankcard, which offers a MasterCard with 36% interest, says rates are higher than other cards because most of the people with the card are trying to rebuild their credit after past problems. In a news release two years ago, the bank said it issued about 70% of the nation's credit cards offered to people with credit scores of 600 or lower.
"It's about managing the risk with these people," he said. "It's like car insurance. If you've had an accident in the past, you will pay higher rates for awhile."
He says Premier Bankcard does "absolutely no marketing" of cash advances, but that the service is available to those who might need it.
Several big banks declined to discuss cash advance policies for this article, but they pointed to articles or Q-and-A's on their websites that disclose how customers can receive a PIN to access cash advances, and the fees they charge.
Discover, for instance, suggests that cash advances can come in handy for emergencies or "'cash-only' situations such as paying for kids' camps and sports fees or giving a last minute gift." Bank of America offers some tips for avoiding the need for a cash advance, such as creating a budget and building an emergency fund.
Effect on consumers
The interest rates and fees for cash advances can be substantial -- and they can cost you hundreds of dollars more than other alternatives.
Say your employer has fallen on hard financial times and furloughs you without pay for two weeks. You're unable to afford your share of the rent, which is $1,000. If you take a cash advance to pay it, and repay that amount in a year by making payments of $100 a month, you would pay about $190 in fees and interest, assuming the typical rates identified in the CreditCards.com survey.
If there's an upside, maybe it's that the interest and fees on credit card cash advances are less than what they would be for payday loans, whose rates, when annualized, approach 400%.