Credit card checks can be costly

By Jeremy Simon

Credit card issuers frequently mail cardholders a blank check along with their monthly statement. But while it may be appealing to use one of these checks for some quick funds, the costs involved can be quite high.

According to non-profit group Consumer Action, credit card checks act in the same way as a cash advance on a credit card.

The fees involved in using a credit card check may be steep. A transaction involving withdrawing cash or writing a credit card check is subject to an upfront fee of 2 percent to 4 percent of the cash advance amount. Additionally, the transaction is also subject to a higher interest rate.

In its 2007 Credit Card Survey, Consumer Action found that the average cash advance APR was 21.65 percent on all credit cards it looked at.

The group also found 89 percent of the cards surveyed charged a higher APR for cash advances than other charges, compared to 14 percent in 2005. For the cards that charge more interest on cash advances, the difference between the purchase rate and cash advance rate was 8.2 percentage points.

Unlike the float offered on credit card purchases, there is no grace period for cash advances. Instead, interest begins to accrue starting with the day the cardholder takes the cash advance.

For example, getting $100 with a blank credit card check can result in $12 worth of fees and interest for that month. Although that sounds reasonable, it actually amounts to an annualized interest rate of about 144 percent, which Consumer Action notes approaches payday loan rates.

Separately, because of the way credit card payments are applied by issuers, cardholders who are working to pay down their balance will not initially reduce their cash advance balance.

The reason for this is that monthly payments are first applied to the portion of credit card balances that charge the lowest APR, meaning lower-interest purchase or balance transfer APRs get paid off first while cash advance balances continue to accrue interest.

Occasionally, credit card issuers provide convenience or balance transfer check promotions that offer 0 percent APR for 12 months or a low fixed APR until the balance is paid off.  However, the payment allocation methods described above typically apply.

Therefore, most consumers would do best to steer clear of credit card checks unless their need for immediate cash outweighs all the aforementioned costs. And, rather than simple throwing away the blank checks, run them through the shredder, first.

Published: July 10, 2007