I have a credit card. When I go and make a purchase at a store, they charge me 14.9% a year to carry a balance.
But when I go to a cash machine and take cash out, they charge me 1) a fee and 2) an interest rate somewhere in the twenties for that transaction. This I do not understand. Why is it that a cash advance somehow costs them more than a regular purchase? Or is the higher interest rate just to discourage making massive amounts of cash advances on your credit card? Forgive me if this is a stupid question, but I know nothing about finance.
Dammit, it must be late. Sorry about the bad subject line everyone, I was going to ask a question about the drug war but then I saw my credit card lying on the counter and was reminded of this question. First thread and already I look like an idiot…Off to a great start :o). If a moderator could change that subject line, that would be great.
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[note: I changed the thread title. It’s pretty long, so I might change it again. It will still have the same theme, but I wanted to give the head’s up to those following this thread. -manhattan]**
I don’t know, but I’ll WAG. I always imagined that the card companies take was, if your getting cash advances on a credit card, they’ve got you where they want you. That is to say, if you’re in a position where getting an advance is an option you’ll pursue, then you’re in that segment of the market that has fewer options and they can charge you what they will.
When you make a purchase with a credit card, they charge you interest unless you pay in full at the end of the pay period, plus the merchant gets charged. An ATM withdraw would bypass the merchant fee. Plus there would be vast abuses if it was something you could pay back in full at the end of the period.
What a coup!! Max out your card on an ATM; Collect interest on it, and then pay it back in full interest free; just to repeat it the next month. Credit card firms are wise to that trick.
The Drug War is waged by our Benevolent Government in order to prevent people from embarrassing themselves by getting “high” and then opening threads on message boards where the subject doesn’t match the post.
Now, romanticide, we have this little paper cup, and we need you to fill it up…
Welcome guy and do not use drugs while posting on this MB, till the gov wins the drug war :-).
Anyway:
when you make a purchase, the Company does not spend any money: usually they do not transfer any money to the merchant till you pay them. They will transfer the money if you do not pay within “the grace period”. Then they will charge you 14% or whatever. And they charge the merchant, regardless, ~1%. If you take cash advance, they give you cold cash, out of their pocket. In theory, if you do not pay for the merchandise, they own it till you pay and they can take it away for non-payment. They never do it in practice, but it’s formally “a secured loan”, governed by state/federal laws. If they give you cash advance, it’s “unsecured loan”, without “collateral”. If something happens to you (like OD) (God forbid!), they will loose the actual money.
Besides, in theory, you can borrow at 21% and invest it at 25% (the stock market was rising ~30%/year in recent years, as measured by S&P500. Relax, you are late, it’s down this year.
When you make a credit card purchase the store gives the creditcard company some money 2% or 3% of the purchase. If they make a cash advance it is you who have to pay otherwise the credit card company will not get any money and that just isn’t right.
cooldude is right. If cash advances weren’t more expensive you could use advances on one card to pay off another. With a number of cards a customer could keep rolling over the debt. If you had a credit card with an interest free period you could use this to get interest free loans up to your credit limit. If not there is no way payment history could predict continued payment. Either way companies would have to lose money, so there would be no credit cards.
I’m not sure just why they do that, and I’m also not sure just how banks get away with charging what they do change anyhow but I do know that you have to figure out a way to pay the cash advances off first! If not, payments you send in on your card go to the normal balance, leaving the cash advance to accumulate more and more monthly charges.
It’s a pleasant little trick they have there. When I did it, the cash advance did not vanish until I had paid off the previous balance prior to the advance and then payments went to the CA, which by then came up to considerably more than I had gotten originally.
I make no more cash advances. I’m thinking about pulling my money out of banks anyhow and shoving it into a safe in my home to avoid all of the charges.