All About Convenience Check and Cash Advances

Credit card cash advances and convenience checks can provide consumers with convenient and instant access to cash in times of financial need. However, cash advances and convenience checks are typically accompanied by fees and sky high interest rates. Also, you’re start paying interest from the day check is posted or money in withdrawn from an ATM with no grace period like regular credit card purchases. Before we discuss the pitfalls of using cash advances or convenience checks, let’s take a closer look to understand the business logic behind these offers.

Convenience checks, which are typically mailed in sets of three, are special checks tied to a person's credit card account that can be used to make purchases or to transfer balances. In recent times, credit card companies have started to mail check booklets instead of two or three checks realizing that you stand far better chance of success if they offer more. Some of the checks might even have an amount and your name pre-printed on them. All you have to do is just sign and deposit them in your checking account. What a convenience, you don’t even have to fill out the amount. But do they really offer any convenience or just financial trouble?

Credit card Cash advances are typically money withdrawn from the ATM using your credit card and the PIN. You get the cash instantly in your hand and you’re free to do whatever you would like to do with your cash. Most people don’t realize that ATM's do charge fees for using them. This fee is charged by the financial institution that owns the ATM. So if you’re getting cash advance from an ATM machine, you would pay ATM fees on top of everything else that your credit card company charges you.
Cash advances and convenience checks can wreck havoc on your financial life. They are a major stumbling block for consumers seeking debt relief. Convenience checks mailed to consumer who are in financial trouble are like cigarettes offered to a smoker who is trying to quit.

Now we have a basic understanding of cash advances and convenience check, let’s move on to the financial pitfalls associated with cash advances/convenience checks.

First thing you would find out about these offers is that fees can be very costly. These fees are calculated using two distinct methods – Percent of the amount and fixed dollar amount. Most card issuers calculate fees on a percentage basis, which typically ranges from 1% to 4%. Other issuers charge "flat fees" for advances. "Flat fees" are not based on the amount of the advance and, therefore, are always the same. Which one would make most profit for the credit card company? Well, it depends. For example, if a credit card company mails you a check booklet for cash advances, it makes more profit for them if they have a minimum flat fee option with regular percentage fee.

Here is an example to explain this.
Let’s say you have a credit card that mails you a convenience check booklet for cash and you’re allowed to borrow up to $5,000. For our calculations, we are assuming 3% flat fee or a minimum of $60 per advance. Now if you have 10 checks in your booklet, how you use them is going to dictate your final cost as far as fees are considered. In our example, we are going to discuss two customers and how their actions would change the transaction fee structure.

Remember, both customer would still pay a very high interest rates(as much as 30%) and that is independent of how you use these checks.
First consumer writes a single check for $5,000 and deposits it in his/her bank account.
Total transaction fee for this check = 3% of the advance = 5000 X 0.03 = $150.
Minimum fee per transaction = $60
Credit card company is going to charge the greater of the two and thus total transaction fee in this cash = $150.
Now take a look at another customer who is also going to use $5,000 but a little differently.
This person writes 5 checks each with $1,000 to pay off bills and living expenses.
Total transaction fee for each check = 3% of the advance = 1000 X 0.03 = $30.
Minimum fee per transaction = $60
So credit card company will charge $60 in this cash and since there are 5 checks, total transaction fee = $60 X5 = $300.

Did you notice the difference? Just by writing some extra checks, this customer is going to pay an additional $150. And this number could be even higher($600) if he/she would have used all 10 checks. So technically you could pay as much as $600 or 12% just by using these checks and we’re not even talking monthly finance charges. As you can see, fee calculations are tricky and you should pay close attention to the fine print in your cash advance offer.

Once they have used these checks, next pitfall for consumers involves finance or interest charges. The interest rate for cash advances is often several points higher than the normal purchase interest rate (the rate that is associated with everyday card purchases). For example, a credit card with standard purchase rate of 12% may have a cash advance rate of as much as 29.99%. However, there are few credit card issuers who charge the same rate for purchases and cash advances. So if you use cash advances on a regular basis, make sure you get yourself one of these cards. Other finance charge pitfalls involve grace periods and the payment method that a card issuer utilizes. Cash advances typically begin accruing interest immediately and, therefore, are not subject to a grace period. For example, even if you pay your card balance in full when your bill arrives, you will still be accessed a finance charge for any advances. A similar pitfall involves the manner in which payments are applied to your account. Almost all issuers apply payments to card purchases before they apply payments to cash advances (i.e. payments are first applied to purchases). For example, if you have $1000 purchase balance on your card with 10% interest and you take $2000 cash advance on this card with 25% interest, your effective interest rate will be 25% until you pay off $1000 purchase balance with interest charges. So if you’re going to use your cash advances for purchases, why not use the card for those purchase and keep the lower interest rate. A smart idea is to never carry any cash advances on a card that has existing purchase charges.

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Convenience checks can also be used to commit fraud. There's no signature verification with convenience checks as there is with credit cards. So if a thief should come upon a convenience check, they could cash it, go shopping, open a banking account --- whatever they want.  People sometimes just toss them in the trash. That could be a very serious problem and you could end up with thousands of dollars worth of debt without even knowing about it. So if you don't plan to use them, shred them. Only a handful of card issuers have stepped up security measures on convenience checks. For example, American Express cardholders must call a toll-free number to "activate" the checks.

Sometimes people are not aware that credit card checks that they receive in the mail are usually treated as cash advances! Card issuers often tout such checks as an easy way to pay off the bill of your choice or to acquire some extra spending money. These offers start to flood mail boxes around holiday shopping season because credit card companies know that they have better chances of trapping you during this time. While using a check may be convenient, it can be extremely costly. While a convenience check may be tied to a credit card account, it does not give you the same kinds of consumer protections as a credit card. If you purchase unsatisfactory merchandise with a credit card, you can request a chargeback from your card issuer and the charge will be removed from your bill.
If a product purchased with a convenience check is defective or you don't like it, your bank won't be able to help. In cash of convenience checks, merchant has your money and you have to fight. If you do make a purchase with a convenience check, pay off the balance as soon as possible. Only use a convenience check when you absolutely have to.

Many issuers also use convenience checks in low-rate balance-transfer promotions. Signing and mailing the check from issuer A pays off the balance with issuer B. The balance then appears on a bill from issuer A.

Dependency on cash advances can be an outward sign of serious debt problems. Consumers that regularly rely on advances to "make ends meet" urgently need debt counseling. Cash advances are so tempting that some cardholders fall victim to the "cash advance trap" and find themselves caught in a vicious cycle.