What Is a Cash Advance Interest Rate & How Does It Work?
Understand cash advance interest rates, how they differ from purchases, and the true cost of accessing cash from your credit card.
A cash advance allows access to funds directly from a credit card’s credit limit. This option lets cardholders convert a portion of their available credit into immediate cash. While it provides quick liquidity, understanding the mechanics and associated costs is important.
Understanding Cash Advances
A cash advance is a transaction where you withdraw money against your credit card’s available credit limit. Unlike a regular credit card purchase, which involves buying goods or services, a cash advance provides actual currency. This immediate access to funds functions like a short-term loan from your existing credit line.
There are several common ways to obtain a cash advance. You can withdraw cash from an ATM using your credit card and a Personal Identification Number (PIN). Another method involves going to a bank or financial institution branch and requesting cash over the counter with your credit card and identification. Some credit card issuers also provide convenience checks, which can be written and cashed or deposited like a personal check, with the amount counting as a cash advance against your credit limit.
How Cash Advance Interest Rates Work
Interest rates for cash advances differ significantly from those applied to standard credit card purchases. The Annual Percentage Rate (APR) for a cash advance is usually higher than the APR for retail purchases on the same card. Cash advance APRs can be substantially elevated, often 25% to 30% or more. This higher rate reflects the perceived increased risk.
Interest on cash advances accrues immediately. Unlike credit card purchases with grace periods, interest on cash advances starts from the transaction date. There is no interest-free window; finance charges apply the moment cash is withdrawn. Interest is commonly calculated daily on the outstanding cash advance balance, using the daily interest rate, which is the annual rate divided by 365.
Additional Costs Beyond Interest
Beyond the interest rate, cash advances often incur other fees. A common charge is the cash advance fee, applied directly to the amount advanced. This fee is typically structured as either a flat amount or a percentage of the cash advance, with the credit card issuer charging whichever is greater. For instance, a fee might be $10 or 3% to 5% of the advanced amount.
These fees are charged upfront, added to your balance immediately. ATM fees from the operator may apply if the ATM is not part of your card issuer’s network. These fees are separate from the credit card’s cash advance fee and add to the total expense.
Calculating the Total Cost of a Cash Advance
The total cost of a cash advance combines the initial amount borrowed with all applicable fees and accrued interest. The full cost includes the principal amount of the cash advance. Add the cash advance fee imposed by your credit card issuer. Any ATM fees should also be included.
Interest accumulates from the transaction date until the balance is fully repaid. With no grace period, longer repayment periods accrue more interest. This cumulative interest, added to the principal and all fees, shows the total cost.