How to Calculate Cash Advance Interest on a Credit Card

A credit card cash advance allows you to borrow a sum of money directly from your credit card’s available credit limit. This provides immediate access to funds. Understanding how interest is calculated on these transactions is important, as costs can accumulate quickly. Unlike typical credit card purchases, cash advances have distinct financial implications, making them a more expensive borrowing option.

Key Differences of Cash Advance Interest

Cash advances carry a different interest structure compared to standard credit card purchases. A primary distinction is the Annual Percentage Rate (APR) applied to cash advances, which is typically higher than the APR for purchases. While purchase APRs might range, cash advance APRs are often closer to 30% or even higher.

Another significant difference is the absence of a grace period for cash advances. For regular purchases, many credit cards offer a grace period, allowing you to avoid interest charges if you pay your balance in full by the due date. With a cash advance, interest begins accruing immediately from the transaction date.

In addition to interest, cash advances incur a separate transaction fee. This fee is commonly structured as a percentage of the advanced amount, often ranging from 3% to 5%, or a flat minimum fee, such as $10, whichever is greater. This upfront charge is added to the principal amount of the advance, increasing the total amount owed.

Gathering Information for Calculation

To calculate cash advance interest, gather specific details from your credit card agreement or monthly statement. The first piece of information is the cash advance APR, which is usually listed separately from your purchase APR. You can typically locate this rate in the Schumer Box section of your cardholder agreement or on your billing statement.

Next, you will need to determine your card’s daily periodic rate (DPR). This rate is used by credit card issuers to calculate interest on a daily basis. You can derive the DPR by dividing your cash advance APR by the number of days in a year, which is typically 365, although some issuers may use 360 days. For example, an APR of 29.24% divided by 365 days would yield a DPR of approximately 0.0801%.

You must also know the exact cash advance amount you received. Finally, identify the number of days interest will accrue, which is the period from the transaction date until the advance is fully repaid. Since interest begins immediately, every day the balance remains outstanding contributes to the total interest charge.

Performing the Interest Calculation

Calculating cash advance interest involves a straightforward formula. The interest is determined by multiplying the cash advance amount by the daily periodic rate and then multiplying that result by the number of days the balance is outstanding. This daily compounding means that interest is added to the principal each day, and subsequent interest is calculated on this new, slightly higher balance.

For example, consider a $500 cash advance with a cash advance APR of 29.24%. First, calculate the daily periodic rate by dividing the APR (as a decimal) by 365: 0.2924 / 365 = 0.000801. If you repay the $500 cash advance after 15 days, the interest accrued would be $500 (cash advance amount) multiplied by 0.000801 (daily periodic rate) multiplied by 15 (number of days), equaling approximately $6.01. It highlights how quickly interest can accumulate due to daily accrual. The calculation focuses solely on the interest component, assuming initial fees have already been added to the principal balance.

Understanding Total Cost and Repayment Impact

The total cost of a cash advance combines the calculated interest with the initial cash advance fee. If, in the previous example, a 5% fee was also applied to the $500 advance, that would be an additional $25 ($500 x 0.05). Adding this fee to the $6.01 in interest, the total cost for borrowing $500 for 15 days would be $31.01, bringing the total repayment to $531.01.

The speed of repayment significantly impacts the total interest incurred due to the daily accrual model. Repaying the cash advance as quickly as possible, ideally before the next statement cycle, minimizes the number of days interest has to accumulate. Even partial payments can reduce the principal balance, thereby lowering the amount on which daily interest is calculated.

Federal regulations, specifically the CARD Act of 2009, stipulate how credit card payments are applied to balances. Any amount paid over the minimum payment due must be applied to the balance with the highest interest rate first. Since cash advances typically carry the highest APR on a credit card, any extra payments you make will prioritize reducing this expensive debt.