When you find a credit card with a low interest rate, rewards, zero maintenance fees and use it responsibly, it can do good things.
In addition to establishing valuable credit history, it can also provide purchase protection that cash just won't. But, no matter how great your card performs, there are three features it likely offers that you may be better off to ignore.
Convenience Cheques
You've probably gotten a blank cheque or two in the mail from your credit card company, touting benefits like "cash whenever you need it", and "a great way to cover larger expenses". Known as "convenience cheques", these are usually nothing more than a cash advance in disguise. And not only is the cash far from free, it's even more expensive than meets the eye.
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Interest rates on cash advances have always been hefty, reaching as high as 25 per cent in some cases. But overall costs on these transactions are climbing even higher as credit issuers seek to make profits in areas not affected by the 2010 credit card consumer protection laws.
Not only are the interest rates rising, but many now come with minimum flat-fee charges, regardless of the transaction amount. On top of that, caps that were once in place to keep fees to a certain level have been removed.
Another critical component that can make convenience cheques costly is the timing policy. In most cases, the meter starts running as soon as you use the cheque. So, where you can charge purchases on a credit card and avoid interest payments if you pay the balance in full during the grace period, there is no such option with a cash advance cheque.
ATM Withdrawals
You may have noticed that shortly after you open a credit card, the issuer makes certain to send you a nifty pin number, so that you can visit any ATM to withdraw cash with your credit card. After all, it's just like using a debit card to get cash from your account, right? Hardly. While the process may feel the same to you, it is far from the traditional act of withdrawing money.
The reason to avoid credit card cash advances is generally common sense. If you need to pull cash from your credit card, the odds are pretty good that you don't have the actual cash flow available at the time of purchase. In turn, you'll pay interest on the money until you can pay off the purchase balance.
But, even if you do intend to pay the balance in full and just need quick access to cash, using the ATM Pin with your credit card will cost far more than the amount you actually withdraw. Most credit cards charge a flat cash advance fee, regardless of the transaction amount. So, if you withdraw $20, you could be charged half of that, just for using the service offered by your creditor. On top of that, the institution who owns the ATM will take their cut and charge you for the use of their machine.
Balance Protection
Also known as credit card insurance, this service is offered by credit card issuers to provide a safety net in the event of involuntary job loss, disability, critical illness or accidental death & dismemberment. For some it may be helpful, particularly if you could not maintain your minimum payments should one of the above happen. But, you do pay for this service based on the balance you carry.
That said, it's important to bear in mind that the insurance doesn't cover your debt with the exception of credit life protection. It covers your minimum payments for the term of the contract. And thanks to compounding interest, if you do file a claim, your balance could actually be higher at the completion of the protection contract.
The Bottom Line
There are plenty of good credit cards out there, when used responsibly. But, it's important to understand the implications of the many features they offer so that you don't fall prey to unknowingly using services that could be costly.
Stephanie Christensen
