Family Matters

Q

I recently used my credit card to withdraw cash at an ATM and was surprised at how high the fees were. Can you explain how cash advances work with the average ATM?

A

Don't feel too bad. I recently found myself caught in similar circumstances, and it's worth an article so our readers can avoid making the same mistake we both made.

On a recent Saturday, I took my oldest daughter to an Irish dance competition. I normally carry very little cash. In this case I had nothing, so we looked for an ATM to make a $20 withdrawal in order to pay for entry fees and lunch. With what I know now, I regret not having withdrawn the money from our bank ahead of time.

Using my credit card (rather than my bank's ATM card), we asked for $20. When the ATM notified me of a $1.50 transaction fee, I wasn't pleased, but I half expected it. What I wasn't ready for was my credit card bill when it arrived a few weeks later. Included was a $3 processing fee, plus a finance charge of $.50 on the average daily balance of $7.85. All in all, I paid $5 in order to take . out $20. That's the equivalent of 25% interest just for the day and more than 9,000% annualized!

When using an ATM, there are a number of issues to consider. First, unless the ATM belongs to your bank, you will probably be charged just to access the machine. That's what the $1.50 fee was for. The second issue relates to using a credit card at an ATM and the difference between how purchases and cash advances are handled. For years, Chelsey and I have used our credit cards for convenience, always paying the balance in full each month. Not ever having used my credit card for a cash advance, I thought the host bank's fee of $1.50 would be the only charge.

The fine print of our credit-card agreement explains that purchases aren't assessed a finance charge as long as the entire balance is paid off each month. Cash advances, on the other hand, are subject to different rules — including the transaction fee of $3 and finance charges, which accrue based on the transaction date. You'll want to read your credit-card agreement and make sure you avoid any regular cash advances if the fee is anything like what I experienced.

In order to avoid getting caught with no cash on hand, I encourage you to maintain an envelope in the home with sufficient funds to pay for goods and services where a check or credit card isn't accepted. You can replenish this on a weekly or monthly basis.

One of the problems with using too much cash is the difficulty in remembering how it was spent. Make sure you know where your cash is going. You can either record how it was spent on the envelope or you might know that cash purchases are limited to one spending category. For example, since Chelsey and I pay for groceries and gas with our credit cards (paying the balance in full every month), we know that our cash spending is for the occasional meal out. As a result, I can code all cash withdrawals directly to that account.

God love you!

Phil Lenahan is director of media and finance at Catholic Answers in El Cajon, California.

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