How Interest Works on Cash Advances
Cash advances come with unique interest calculations and can be costly. Gain insight into how interest works on cash advances and make informed borrowing decisions.
Interest on cash advances works differently from the interest on regular credit card purchases. Cash advances are essentially short-term loans that you take from your credit card, and they typically come with higher costs and immediate interest charges. Here's how interest works on cash advances:
Higher Interest Rates: Cash advances typically have a significantly higher annual percentage rate (APR) compared to the APR for regular purchases on your credit card. This means you'll be charged a higher interest rate when you take a cash advance.
Immediate Interest Charges: Unlike regular credit card purchases, which often have a grace period during which you can pay the balance in full without incurring interest charges, cash advances start accruing interest from the moment you withdraw the cash. There's usually no grace period for cash advances.
Interest Calculation: The interest on cash advances is typically calculated daily or on a daily balance basis. This means that the interest accrues every day based on the outstanding cash advance balance.
Higher Costs: Due to the combination of a higher APR and immediate interest charges, cash advances are costly. The interest rates on cash advances can often be in the double digits, and the interest charges can add up quickly.
Minimum Finance Charges: Some credit card issuers have minimum finance charges for cash advances. This means that even if you pay off your cash advance quickly, you may still have to pay a minimum amount in interest.
Priority Payments: When you make payments on your credit card, the payments are often applied first to the balances with the lowest interest rates. This means that if you have both regular purchases and a cash advance balance on your card, any payment you make will typically go toward paying off the lower-interest-rate balance first. The cash advance balance will continue to accrue interest until the lower-rate balances are paid off.
No Grace Period: As mentioned earlier, there's usually no grace period for cash advances. This means you'll be charged interest from day one until you pay off the cash advance balance in full.
Given the high cost and immediate interest charges associated with cash advances, it's advisable to use them only in emergency situations. It's generally more cost-effective to use other sources of funds, such as a savings account, a personal loan, or a traditional credit card purchase for planned expenses. If you must take a cash advance, pay it off as quickly as possible to minimize the interest charges, and be aware of the terms and fees associated with cash advances on your specific credit card.
How does interest accrue on cash advances, and what are the costs involved?.
Interest on cash advances accrues immediately, from the date of the advance. This is in contrast to purchases, which typically have a grace period before interest begins to accrue.
The interest rate on cash advances is typically higher than the interest rate on purchases. This is because cash advances are considered to be a riskier type of transaction.
In addition to interest, there is also a fee associated with cash advances. The fee is typically a percentage of the advance, typically around 3%.
Here is an example of how interest accrues on a cash advance:
- You take out a $500 cash advance on your credit card on August 1st.
- The interest rate on cash advances is 25%.
- The fee for cash advances is 3%.
You will be charged a $15 fee for the cash advance. You will also be charged interest on the $500 advance, at a rate of 25% per year.
If you do not pay off the cash advance in full by the end of the billing cycle, you will be charged interest on the remaining balance. The interest will continue to accrue until the balance is paid in full.
It is important to note that the terms and conditions of cash advances vary from credit card to credit card. Be sure to read the terms and conditions of your credit card carefully before taking out a cash advance.
Here are some tips for minimizing the costs of cash advances:
- Avoid taking out cash advances unless absolutely necessary.
- Pay off the cash advance as quickly as possible to avoid paying interest.
- If you must take out a cash advance, compare the terms and conditions of different credit cards to find the lowest interest rate and fee.
Overall, cash advances can be a convenient way to get cash, but they can also be expensive. Be sure to understand the terms and conditions of cash advances before taking one out.