Sandra MacGregor
Erica Corbin
In recent years, gift cards have become an increasingly popular choice both as presents and as a form of prepaid payment card. It’s easy to see why: they’re sold in numerous places, they’re easy to use, they feel less impersonal than cash, and they can even be added to digital wallets.
But if you purchase a gift card with a credit card, you could be in for a nasty — and costly — surprise. That’s because some credit card providers may classify gift card purchases as “cash advances,” which can lead to extra fees and high interest charges.
The cost of cash advances
So, why is it a big deal if your credit card issuer labels your purchase a cash advance rather than a gift card? Firstly, most credit card providers charge a higher rate of interest for cash advances than they do for standard purchases, often several percentage points over the normal purchase rate.
Take, for example, the Scotia Momentum No-Fee Visa card, which charges 19.99% on purchases but 22.99% on cash advances. The BMO eclipse Visa Infinite card similarly charges 20.99% for purchases and as much as 23.99% for cash advances.
What’s more, unlike standard purchases, where you typically enjoy a minimum 21-day payment grace period, cash advances start accruing interest immediately. You can get into a debt spiral quickly this way, especially if it takes you a while to realize your gift card purchase was coded as a cash advance.
Also be aware that in Canada, most credit card issuers charge an average fee of $5 when you take out a cash advance.
How to avoid a gift card getting coded as a cash advance
If you want to buy a gift card with your credit card, there are some strategies that can help you avoid the purchase being labeled a cash advance:
- Read through your cardholder agreement. Check if there is any information on gift cards and how they’re coded.
- Contact your credit card provider directly. This is the best way to get a clear, definitive answer on how your purchase will be coded.
- Aim to buy gift cards at a grocery store. Some analysts suggest that gift cards purchased at grocery stores fall under the umbrella category of “groceries” and therefore, you wouldn’t run the risk of having your purchase labeled as a cash advance.
- Avoid Visa and Mastercard gift cards. There’s some evidence that you may run more of a risk of getting your gift card purchase coded as a cash advance if you buy these types of prepaid cards. A closed-loop card (i.e., one you can only use at a specific place, such as Walmart or Amazon) is easily identified as a gift card. But a Visa or Mastercard prepaid card is sometimes seen by issuers as a cash equivalent, because it can be used almost anywhere.
- Turn off your card’s cash advance feature, if possible. While there appears to be conflicting evidence on this topic, it’s been reported that some credit card companies may allow you to essentially turn off your card’s cash advance feature, ensuring that a gift card purchase can’t lead to cash advance charges.
When in doubt, it’s best to pay for gift cards with cash or a debit card. This ensures funds are taken directly from your bank account and you won’t incur interest or extra credit card fees. If you want to go the credit card route, make sure to do a little digging before making a significant purchase.
About the Author
DIVE EVEN DEEPER
How to Read Your Credit Card Statement
Your credit card statement is a record of all your transactions during a billing period. It also includes important account information and details that can help you master credit card management and ensure you’re not the victim of fraud.
Are You Checking Your Credit Card Bill Often Enough?
Checking your credit card statements at least once a month can help you spot fraud and curb debt spirals.
Georgia Rose
Credit Cards vs. Debit Cards: Differences Explained
A debit card spends money that’s in your bank account, while a credit card spends borrowed money, up to a limit.
Hannah Logan
Cash Advance vs Personal Loan: How to Choose
A cash advance is a short-term financing option with very high interest rates, while a personal loan is a longer-term financing option with lower rates.