@Creditaddict wrote:
@creditconcept wrote:
If the bank is putting out the same dollar amount as a purchase, say $100 why are cash advances subject to outrageous interest? Even when you pay the ATM fee anyway.
Because banks starting telling all us little people a long time ago that it was showing risk and because of that they would charge us a lot... and everyone said "oh, yes of course... if it's emergency I would pay 25%"
and then that person told 10 people they knew who told 10 others they knew until everyone said CASH ADVANCE IS RISKY AND YOU WILL PAY A TON FOR IT and it's the right thing to pay!
Banking industry WON!
+1
If you compare the rates for unsecured personal lines of credit at for-profit banks like Wells Fargo, City National Bank, Citibank, etc, you will see that the best rates for Personal Unsecured Lines of Credit (which I would argue are equivalent to cash advances on a credit card) are often at lower APRs than credit cards for the same institutions. I'm leaving credit unions out of this because I know CUs that have lower rates on their unsecured personal lines of credit, and others that have higher rates. I would attribute the less consistent behavior at CUs to their not-for-profit charter and the lack of sophistication in their risk management (and as a result, worse risk pricing).
The best personal unsecured line of credit rates available at national banks like Wells Fargo, Citibank, etc are a function of the state you live in.. I would argue this is a result of competitive pressures between banks, not that people from certain states are riskier than others or that some states have significantly more costly regulation or anything.
The cost of conducting a cash advance or tapping your line of credit are minimal (I think the direct cost of ACH is ~$0.50.. I'm sure the direct cost of pulling the money from an ATM is minimal too.. but there are other overhead costs a bank needs to cover, too). However, these transaction costs are more than covered by the $25 or so annual fee that many for profit banks charge for unsecured lines of credit or the capped cash advance transaction fees on Credit Union credit cards (often $50 or so.. although many CUs have no transaction fee).
For a cash advance or personal unsecured line of credit, the bank ensures that they make money when they set the (cash advance apr) > (cost from risk + cost of money).
For purchases, they need to collect the interchange fee because you are going to tie up their money (think about the bank's cost of money) for a while (time remaining in the statement + grace period) without the customer paying any interest.
So in conclusion, if you want to take a cash advance from a credit card, but the card owner wants you to pay a big transaction fee (for example, 3% with no maximum amount)... or they have some ridiculous cash advance APR.. then they are doing it because they can get away with it.. that's what some people are willing to pay, they don't know about the fees, or don't know how to avoid them. Those banks are making money when customers fall for their convenience. Instead, you should use a card that doesn't have those fees (Barclay's Ring, many Credit Union cards, etc) or use an unsecured personal line of credit (often at the same bank) to get a lower cash advance APR without the transaction fee.
