In early February, Coinbase, a leading cryptocurrency exchange, alerted some of its customers to a significant policy shift. Major credit card networks have begun classifying cryptocurrency purchases as cash advances. This change means that buying digital currencies with a credit card may now incur additional fees and higher interest rates, as determined by individual card issuers.
The email from Coinbase did not specify which credit card companies were implementing these changes. However, it emphasized that the new merchant category codes (MCCs) applied to crypto transactions enable banks and card issuers to levy cash advance fees. Importantly, Coinbase clarified that it does not charge or collect these fees itself.
Understanding the Policy Change
Mastercard confirmed that it had recently provided guidance to acquirers—the banks that work with merchants—regarding the correct MCC to use for cryptocurrency purchases. This ensures a consistent approach across the board, giving both merchants and issuers a clear view of these transactions.
Visa, on the other hand, stated that the decision to charge any additional fees rests solely with the individual financial institutions that issue the cards. This means that practices may vary between different banks and card providers.
Reports from users on platforms like Reddit suggest that these changes are already affecting Visa and Mastercard customers in the United States and Canada.
What Are Cash Advance Charges?
Merchant category codes are used by credit card companies to categorize different types of transactions, such as retail purchases, travel, or dining. By reclassifying cryptocurrency purchases under codes typically used for cash advances, issuers can apply corresponding fees and interest rates.
Cash advances usually come with steep costs. For example, a popular Visa card might charge a fee of either $10 or 5% of the transaction amount—whichever is higher. Additionally, the annual percentage rate (APR) for cash advances can be significantly higher than for regular purchases. In one case, the APR jumps to 26.24%, compared to a range of 16.24% to 24.99% for standard transactions.
Why Are Card Issuers Making This Change?
Several factors likely contributed to this decision:
- Risk Management: The volatility of cryptocurrency markets poses a default risk for lenders. With bitcoin's value having fallen more than 50% from its late-2017 peak, issuers may be concerned that a market downturn could lead to widespread defaults among borrowers who used credit to invest.
- Curbing Debt-Fueled Speculation: There have been extreme reports of individuals taking out mortgages or going into significant debt to buy cryptocurrencies. Higher fees act as a deterrent, discouraging speculative purchases that are not backed by actual funds.
- Profit Opportunity: The fear of missing out (FOMO) has driven many to enter the crypto market rapidly. Card issuers may see this as an opportunity to generate additional revenue from high-fee transactions during periods of intense buying activity.
Recommended Alternative Payment Methods
Given these new fees, cryptocurrency investors should consider using other payment methods to avoid unnecessary costs. Coinbase and many other exchanges support:
- Debit Cards: While purchases may be processed instantly, users should confirm with their bank if any specific fees apply.
- Linked Bank Accounts (ACH Transfers): This is often the most cost-effective method, though it can take several days for the transaction to complete.
Whichever method you choose, always review the fee structures and processing times beforehand. 👉 Compare payment options for crypto purchases
Frequently Asked Questions
What is a cash advance fee?
A cash advance fee is a charge imposed by credit card issuers when you use your card to obtain cash. This can include withdrawals from ATMs, buying wire transfers, or purchasing certain financial instruments. The fee is typically a percentage of the transaction amount or a fixed minimum charge.
Why are crypto purchases being treated as cash advances?
Credit card networks have reclassified cryptocurrency purchases under merchant category codes that are designated for cash-like transactions. This allows issuers to apply higher fees and interest rates, citing increased risk and the need to discourage debt-funded speculation.
Can I avoid these fees when buying cryptocurrency?
Yes, by using payment methods that are not subject to cash advance fees. Debit cards and direct bank transfers (ACH) are commonly supported alternatives on most crypto exchanges. Always check with your exchange and your bank to understand the specific terms.
Do all credit card issuers charge these fees?
No, the application of fees depends on the individual card issuer's policy. While Visa and Mastercard have enabled this change, it is up to each bank or financial institution to decide whether to implement the additional charges.
Is it risky to buy cryptocurrency with a credit card?
Beyond the potential fees, using credit to buy highly volatile assets like cryptocurrencies is inherently risky. If the value of the asset decreases, you still owe the full amount on your card, plus potentially high interest, which can lead to significant debt.
Will this change affect debit card purchases?
As of now, the reclassification primarily affects credit card transactions. Debit card purchases are typically not treated as cash advances. However, it is always advisable to confirm with your bank to avoid any unexpected charges.
Investing in cryptocurrencies and other digital assets is highly speculative and carries significant risk. The market is volatile, and investors should never invest more than they can afford to lose. It is always recommended to consult with a qualified financial professional before making any investment decisions.