Is Cash Advance Interest Charged Daily?

A cash advance allows individuals to access immediate funds directly from their available credit card limit. This function serves as a short-term borrowing option, distinct from typical credit card purchases. Understanding how interest is applied to these transactions is important for anyone considering this financial tool.

What a Cash Advance Entails

A cash advance involves borrowing cash against your credit card’s available credit line. This can be done by withdrawing cash at an ATM using your credit card PIN, visiting a bank teller, or cashing convenience checks provided by your credit card issuer. Unlike credit card purchases, a cash advance immediately adds the borrowed amount to your credit card balance.

Cash advances incur fees in addition to the principal. A common cash advance fee is a percentage of the amount withdrawn, ranging from 3% to 5%, or a flat fee, such as $10, whichever is greater. This fee is charged at the time of the transaction.

The Daily Nature of Cash Advance Interest

Interest on cash advances accrues immediately from the date of the transaction. This differs from standard credit card purchases, which often have a grace period. A grace period allows cardholders to avoid interest charges on new purchases if they pay their balance in full by the due date.

For cash advances, there is typically no grace period. Interest starts to accumulate from the moment the cash is obtained until the balance is paid in full. Even if repaid quickly, interest charges will still apply for the days it was outstanding. The absence of a grace period makes cash advances a more expensive form of borrowing compared to regular credit card use.

Calculating Accrued Interest

Interest on a cash advance is calculated daily based on the outstanding balance. Credit card issuers determine this using a daily periodic rate, derived from the Annual Percentage Rate (APR) for cash advances. The daily periodic rate is found by dividing the cash advance APR by 365 or 360.

Each day, this daily periodic rate is applied to the outstanding cash advance balance. This process involves daily compounding, where interest accrued on previous days becomes part of the principal balance for the next day’s interest calculation. For example, if a cash advance APR is 29%, the daily periodic rate would be approximately 0.079% (29% divided by 365). Even a small daily rate can lead to a noticeable increase in the total amount owed over time as interest compounds.

Key Differences from Standard Credit Card Interest

Cash advances differ from standard credit card purchases. A primary difference is the immediate application of interest, as cash advances typically lack the grace period often provided for purchases. This means interest accrues from the transaction date, rather than after a billing cycle.

Another distinction is the Annual Percentage Rate (APR). Cash advances often carry a higher APR than the rate applied to regular credit card purchases. This elevated interest rate, combined with the absence of a grace period, increases the cost of borrowing. Cash advances are also subject to an upfront fee, a percentage of the amount borrowed. When making payments, any amount paid above the minimum due is generally applied to the balance with the highest interest rate first, which is frequently the cash advance balance.