Protections, Advantages and Cash Advances
Besides allowing cardholders to stretch payments for goods and service out over time, credit cards offer other advantages to consumers, including purchase and fraud protections and travel insurance. Many credit cards will cover purchased items against theft or damage. Some credit cards will extend the manufacturer's warranty. Purchase protection is a type of insurance that offers immediate coverage for many items purchased with the card. Some credit cards also include price protection as part of their purchase protection program. This coverage allows cardholders to receive the difference on item if it goes on sale after they purchase it. Some cards offer insurance covering rental cars against damage. Consult your credit card informational materials to learn the protections and insurances your card offers.
Credit cards also typically offer fraud detection and prevention features. Credit card companies monitor your purchases looking for unusual activity. If they suspect a transaction is questionable, they will deny the transaction and require that the cardholder call in to verify the purchase. The cardholder will not be liable for fraudulent purchases. Additionally, because the credit card is a line of credit and is not actually money like a debit/check card, cardholders have less at stake. When a fraudulent purchase occurs on a debit/check card account, the cardholder will have lost actual money until the matter is resolved. Credit cardholders are inconvenienced by having less credit available to them until the investigation is complete, but they do not have actual currency removed from their accounts until the issue is resolved.
There are limitations and exclusions for these special credit card programs, but they can be very useful protections
In addition to regular purchases, credit cards can also be used to get cash. You can use a credit card at an automated teller machine (ATM) as well as at many stores to for a cash advance. The cash advance reduces the available credit on the account and is subject to interest charges, just like regular purchases. The interest rate for cash advances, however, is usually very high - often 20% or more. Additionally, the cash advance balance is the last balance to be paid off. Credit card companies, not the cardholder, decide how payments to a credit card account will be applied. These payments, of course, will be applied in a manner that is favorable for the credit card company. Thus, cash advance balances are paid last since they have a higher interest rate. This is true even if the cash advance was the most recent transaction.
For example, Susie Cardholder has a credit card account with ACME Financial. The APR on her account is 13.75% for purchases and 23.50% for cash advances. Susie has carried an account balance of $500 for the past few months. She accrued this balance making regular purchases and not paying her balance down at the end of each month. One weekend she takes a cash advance of $75 against her credit card to fund a night out on the town. When she sends in a payment of $100, the credit card company will apply it to the regular balance of $500, not the cash advance balance of $75. The credit card company makes more money by charging the higher cash advance interest rate, and the bank will apply payments in such a way that that cash advance balance remains on the account as long as possible. Susie would need to pay off the entire regular balance of $500 before any portion of her payments is applied to the cash advance balance. Clearly, it is very bad idea to use a credit card to get a cash advance. If you need fast access to cash, you are typically far better off using your debit card to take cash out of your checking account.