Discover offers some free cash advances – with a potential catch

Certain cash advances are free on Discover credit cards, which is a nice perk if used properly. This is an under-the-radar benefit that I haven’t seen offered elsewhere. But it’s worth digging deeper because there’s a big catch if you typically carry a balance.

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What is a cash advance?

A cash advance involves using your credit card to get cash immediately. The simplest example is at an ATM. Certain cash-like transactions are often labeled as cash advances as well (gambling purchases, bail bonds, money orders and traveler’s checks, for example).

What do cash advances usually charge?

The most common cash advance fee is $10 or 5% of the transaction, whichever is greater, according to an examination of 100 popular credit cards that we conducted last year. Among those 100 cards, 98 permitted cash advances and 96 charged a cash advance fee.

Also, card issuers tend to assess much higher interest rates on cash advances (an average of 24.80% as of April 2020, versus 19.84% on typical transactions when using the same methodology of averaging the midpoints of APR ranges that vary according to cardholders’ creditworthiness).

And cash advance interest almost always begins accruing immediately, even if cardholders normally benefit from an interest-free grace period by paying their previous monthly statement balance in full.

How to avoid these fees with Discover

Discover cardholders can pay with their credit card and request cash at checkout when they shop at more than 60 participating retail chains. Most of these are supermarkets, including large brands such as Kroger, Safeway, Food Lion and ShopRite. Dollar General and the Army & Air Force Exchange Service are a couple other notable names on the list.

Discover limits these cash withdrawals to $120 every 24 hours and notes that some stores set lower limits. The process is similar to obtaining cash back from a debit card at the point of sale. You make a purchase and ask for more money to be taken out of your account, which you get right away in the form of cash.

What’s unique, however, is that Discover allows this on credit cards without the typical cash advance fee at these select merchants. Plus, interest does not begin accruing immediately if you paid your entire previous statement balance before the due date (that’s the potential “gotcha” – more on this in a moment).

But first, why would you even consider a cash advance?

I don’t have a Discover credit card, but I use my Citi debit card to get cash back at the point of sale a few times per year to avoid out-of-network ATM fees. If I need cash and I can’t find an in-network ATM nearby, I’ll make a small purchase at a grocery store and follow the prompts on the PIN pad to take some additional money out of my checking account.

The average out-of-network ATM withdrawal costs $4.59, according to our sister site Bankrate.com, so I think this is a smart workaround. It lets me get cash on the go without incurring the fee.

This is the most consumer-friendly example of a cash advance that I can envision. A more problematic situation would be if you’re desperate for funds and you take out a cash advance to pay a person or business that does not directly accept credit cards. The longer it takes you to pay that off, the more it will cost you. And cash advances don’t earn rewards, so this wouldn’t be a suitable way to get credit card rewards for a cash transaction.

Why does Discover allow this?

These transactions do involve some risk for the card issuer. And to be clear, Discover does charge cash advance fees and begin charging interest immediately on many cash advances (just not at the aforementioned stores).

Even at the stores where cash advances can be free, there’s a significant catch. Discover answers the question, “Is there a special interest rate applied?” by writing, “Not at all – the same purchase APR apply, just like your other Discover card purchases.” But that doesn’t necessarily mean it’s zero.

Discover, more than most card issuers, has a strategy that emphasizes what they call “prime revolvers.” These are people with good credit scores who tend to carry credit card debt from month to month. They can be extremely profitable, because they have good track records of paying their bills on time, but because they revolve balances, they can end up with substantial interest charges over the months and years. For example, Discover’s flagship credit card, the Discover it® Cash Back, charges a variable APR ranging from 11.99% to 22.99%.

While most credit card issuers begin assessing interest immediately on all of their cardholders who take out cash advances and Discover does not always do that, if a Discover cardholder already has existing card debt carried over from the previous statement period (as many do), then they’ve already lost their interest-free grace period. That’s true for “regular” purchases, too (just like other card issuers). If you have existing credit card debt, you’re accruing interest every day against your average daily balance.

In other words, Discover can honestly say it’s not charging you immediate interest because you took out a cash advance, but it might already be charging you immediate interest on all of your purchases for a different reason (because you’re revolving debt on the card).

Bottom line

It’s important to tread carefully when considering a cash advance. Some Discover credit cardholders can take advantage of free cash advances at select retail locations. These can save you a trip to the bank, avoid out-of-network ATM fees and enable you to float certain cash transactions until your next credit card payment is due. But to come out ahead, you need to avoid overspending, and you need to have paid your previous statement balance in full to benefit from that grace period.

Have a question about credit cards? E-mail me at ted.rossman@creditcards.com and I’d be happy to help.