You may not know about Discover’s hidden cash advance benefit. A perk not offered by many other cards, it’s certainly helpful for those in a pinch. But the perk could very easily get out of control if you’re not careful.
[READ: Best Discover Credit Cards]
Cash Back vs. Cash Advance
When getting cash from your credit card, it’s important to know the difference between getting cash back rewards and getting cash as a cash advance. Cash back rewards are usually a percentage of your purchases — say, 2% — and generally are redeemed as credits on your monthly balance. A cash advance lets you borrow against your credit card’s line of credit.
A cash advance will appear on your statement like any other charge, but it will begin to accrue interest immediately until you pay it off. You can access cash on your credit card in a number of ways, including at an ATM, a bank, online or with a convenience check. With Discover, however, you can also get a cash advance at checkout at some of your favorite supermarkets.
Understanding Discover’s Cash Advance Feature
Discover allows its cardholders to get up to $120 cash without a cash advance fee at 73 stores across the country — every 24 hours with no monthly limit. Stores include Aldi, Piggly Wiggly, Safeway, Dollar General and most other popular national and regional chains. The process is similar to how you would withdraw cash from your debit card at checkout: You pay for your purchase and request cash.
Normally, a cardholder would need to pay a cash advance fee of $10 or 5% of the amount of each cash advance, whichever is greater. However, this feature allows cardholders to borrow against their Discover credit card in the amount of $120 every day — with no fee. Also, the same purchase annual percentage rate applies, like with any other Discover card purchase. Normally, a cash advance is charged a higher APR.
While this little-known feature can be helpful for consumers who need cash when a credit card won’t do (hey, I don’t judge), the feature could be easily abused if you’re not careful. With no limit, cardholders could theoretically borrow $120 a day until they hit their credit limit.
Time for a Math Lesson
One not-so-great example of why someone might do this is to pay another credit card with the cash advances from their Discover credit card. But while that might feel like a “beat the system” moment, it can actually hurt you in the long run.
If you have revolving debt on your Discover credit card — meaning you carry a balance month to month — you accrue interest every day against your average daily balance. To figure out your approximate interest charges for a single month, divide your APR by 12 (this is your monthly percentage rate). Next, multiply your monthly percentage rate by your average daily balance.
So for example, if your credit card has a purchase APR of 26%, then the formula you’d use is 26%/12. This comes out to 2.17%. If your average daily balance is $1,000, then you’ll incur approximately $21.67 in interest a month. Mind you, this doesn’t take compound interest into account.
If you need to pay down a balance on another credit card, a balance transfer credit card is a better option. You’re given a true grace period — some as long as 21 months with no interest — to pay off your balance when you first open a balance transfer card. It also doesn’t put your relationship with Discover in jeopardy if you can’t pay back all those cash advances.
[Read: Best Cash Back Credit Cards.]
The Fine Print
While Discover says it doesn’t charge you interest immediately on these kinds of cash advances, it’s more than likely charging you immediate interest on all of your other purchases if you have revolving debt on your credit card. And the likelihood that you have revolving debt is very high since about half of credit card holders carry a balance month to month on their credit cards.
Cash advances also don’t earn rewards. So it’s best to only consider a cash advance if it’s absolutely necessary.
Final Thoughts
Using this cash advance feature from Discover can be helpful if you need cash and don’t want to pay an ATM fee. However, consumers shouldn’t abuse this feature because it could exacerbate their debt.
More from U.S. News
What Is a Cash Advance, and Should You Get One?
How to Calculate Credit Card Interest
Discover’s Unique Feature Allows You to Skip the Cash Advance Fees originally appeared on usnews.com
