Do Cash Advances Get Paid Off First?

A cash advance allows you to obtain immediate cash using your credit card, drawing from your available credit limit. It functions similarly to a short-term loan. Many individuals often wonder how payments are allocated when they have both cash advance balances and regular purchase balances on their credit card. Understanding payment application rules is important for managing credit card debt, especially with cash advances.

How Credit Card Payments Are Applied

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 established specific rules for how credit card issuers must apply payments. When you make a payment that exceeds your minimum amount due, the excess payment must be applied to the balance with the highest annual percentage rate (APR) first. If a cash advance carries a higher interest rate than purchases, payments beyond the minimum will target the cash advance balance first.

The minimum payment itself is typically applied at the issuer’s discretion, often allocated proportionally across different balances or sometimes to the lowest-interest balance first. Credit card issuers calculate minimum payments in various ways, commonly as a percentage of the outstanding balance, often ranging from 1% to 3%, or as a fixed dollar amount, such as $25, whichever is greater.

Therefore, while the minimum payment might not prioritize the cash advance, any additional amount you pay above that minimum will, by federal law, reduce the most expensive part of your debt first. Reviewing your credit card statement will help clarify how your specific payments are allocated and the outstanding balances on different transaction types.

The Cost of Cash Advances

Cash advances are generally a more expensive way to access funds compared to standard credit card purchases. They typically come with a higher interest rate than what is charged for regular transactions. This higher rate reflects the perceived increased risk for the credit card company.

Unlike most purchases, cash advances usually do not have a grace period, meaning interest begins to accrue from the transaction date, not from the end of the billing cycle. This means you start incurring interest charges the moment you withdraw the cash, even if you pay it back quickly.

In addition to higher interest rates and immediate interest accrual, cash advances typically incur an upfront fee. This fee is commonly a percentage of the amount advanced, usually between 3% and 5%, or a flat minimum fee, such as $10, whichever is greater. For example, a $1,000 cash advance could cost an immediate $30 to $50 in fees, plus interest that starts building immediately. These combined costs make cash advances a very costly form of short-term borrowing.

Strategic Payment Approaches

Given the cost structure of cash advances, a strategic approach to credit card payments is highly beneficial. Making payments that exceed the minimum amount due is a primary strategy. Because payments above the minimum are legally required to be applied to the highest APR balance first, this extra money will directly reduce your cash advance debt, which typically has the highest interest rate. This accelerated repayment minimizes the amount of interest that accrues on the cash advance over time.

Paying off cash advances quickly is advisable to limit the impact of immediate interest accrual and the high APR. Even a small increase above the minimum payment can significantly reduce the total interest paid and the time it takes to become debt-free. For instance, doubling a minimum payment can dramatically cut down the payoff period and save hundreds or thousands of dollars in interest.

Regularly reviewing your credit card statements is also an important practice. Statements provide a detailed breakdown of your balances, including purchases, cash advances, and any associated fees or interest charges. Understanding these details allows you to verify how payments are applied and to monitor the reduction of your highest-interest balances. This proactive management helps ensure that your payment efforts are effectively targeting the most expensive components of your credit card debt.