How Is Credit Card Cash Advance Interest Calculated?
Demystify credit card cash advance interest. Learn the calculation process and how distinct terms affect your total borrowing cost.
A credit card cash advance allows cardholders to access immediate funds directly from their credit line, rather than using the card for a purchase. This transaction provides quick liquidity, effectively letting you borrow cash against your credit card limit. The way interest is calculated on a cash advance differs significantly from standard credit card purchases. Understanding these differences is important, as the costs can accumulate rapidly.
Understanding Key Differences from Standard Purchases
Credit card cash advances operate under different terms compared to typical credit card purchases. One primary distinction is the absence of a grace period. For standard purchases, credit card issuers often provide a grace period, during which no interest is charged if the full balance is paid by the due date. In contrast, interest on cash advances begins accruing immediately from the transaction date, meaning there is no interest-free window.
Another significant difference lies in the Annual Percentage Rate (APR). The APR for cash advances is almost always higher than the APR applied to regular purchases on the same credit card. Beyond the elevated interest rate, cash advances also typically incur an upfront transaction fee. This fee is commonly a percentage of the advanced amount, or a flat fee, whichever is greater.
Factors Influencing Interest Calculation
Several components directly influence how interest is calculated on a credit card cash advance. The “Cash Advance APR” is the annual rate exclusively applied to cash advances. This rate is usually detailed in your credit card agreement.
“Cash Advance Fees” are one-time charges assessed each time a cash advance is taken. These fees are typically added to the principal balance of the cash advance, meaning that interest will also be calculated on this fee amount from day one.
The “Daily Balance” is the amount upon which interest is calculated each day. This balance includes the initial cash advance amount plus any associated fees. Credit card issuers track this balance daily to determine the daily interest charge.
The Calculation Process
The calculation of interest on a credit card cash advance typically occurs on a daily basis. To determine the daily interest charge, the annual cash advance APR is first converted into a daily periodic rate. This is usually done by dividing the annual APR by 365. For instance, a 28% cash advance APR would translate to a daily rate of approximately 0.0767%.
Once the daily periodic rate is established, it is applied to the outstanding daily balance of the cash advance. The result is the interest accrued for that specific day.
This daily interest amount is then added to the principal, causing the balance to increase, a process known as compounding. Consequently, the next day’s interest calculation will be based on this new, slightly higher balance. This continuous compounding, coupled with the immediate accrual of interest and the lack of a grace period, means that the total cost of a cash advance can grow significantly and quickly if not repaid promptly.