A cash advance is just that: an advance from your credit card company that puts cash in your hands. Otherwise, with a few exceptions -- when you're paying for something that might be converted to cash -- credit card companies don't charge a cash advance on purchases. When you pay your utility bill, you're paying for utilities you've purchased.
Cash Advance Rates
Under most circumstances, you want to avoid a cash advance from your credit card company. The cash-advance interest rate charged by most credit card companies is substantially higher than the interest rate on purchases. A card with a 12.9 percent purchase rate, for example, may have a cash advance rate of more than 20 percent. In many cases, there is also a one-time 2 percent fee. Another problem with cash advances is that if you already have charges you're paying off on time, the cash advance purchase remains until they're all paid off.
Many states won't allow you to buy a lottery ticket with a credit card, but about a quarter do. If you plan to do this -- which credit counselors advise against -- check with your credit card company before making the purchase. Some companies consider that when you buy a lottery ticket, they're advancing cash rather than paying for your purchase, and you'll be charged the higher rate.
Online gambling, although illegal, is a $6 billion business estimated to grow to $9 billion by 2020. Obviously, a lot of Americans gamble online despite laws against it. Because federal law also forbids credit card companies from transferring money from online gamblers to gambling sites, most offshore gambling websites won't accept credit cards. However, there are currently efforts to overturn these laws. If they succeed, credit card companies may begin honoring customers' online gambling charges. If so, it's likely that they will treat these debts the same way they treat lottery tickets -- as cash advances charged at the higher cash-advance rate. As with lottery ticket purchases, be sure to confirm the interest rate your credit card company charges before gambling online through a credit card.
Unusual Credit Card Charges
A few credit card companies allow you to make a mortgage payment with a credit card. While they don't charge the higher cash-advance interest rate, they do charge a 2 percent transaction fee. While most banks and check-cashing locations won't allow you to buy a money order with a credit card, a retail business may. Your bank will treat this as a cash advance, and you'll be charged the higher rate. Here are two rules-of-thumb that cover most situations: At the conclusion of the transaction, if you have cash or any financial instrument you may be able to convert to cash, such as a lottery ticket, your bank will treat that as a cash advance. If you're paying for goods or services -- such as your electricity, gas and water utilities -- your bank will treat that as a purchase.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.