What Is Cash Interest on a Credit Card?

Credit cards involve various interest charges. While most consumers understand interest on purchases, “cash interest” is a distinct and often more expensive type. This charge applies to transactions that provide immediate cash, unlike typical credit card purchases.

Understanding Cash Interest

Cash interest refers to the finance charge applied to cash advances and similar transactions made with a credit card. The Annual Percentage Rate (APR) for cash advances is generally much higher than for standard purchases. In addition to the higher interest rate, cash advance transactions also incur an upfront fee, typically a percentage of the advanced amount or a flat minimum fee. These combined costs make cash interest an expensive way to access funds.

Transactions That Incur Cash Interest

The most direct way to incur cash interest is through a cash advance. This involves using your credit card to withdraw physical cash, either from an ATM using your Personal Identification Number (PIN) or by presenting your card at a bank teller. The amount you can withdraw as a cash advance is typically limited to a smaller portion of your overall credit limit.

Beyond direct cash withdrawals, other transactions are often classified as cash advances by credit card issuers, triggering the same fees and immediate interest accrual. These include the use of convenience checks, which are blank checks provided by your credit card company that draw against your credit line. Certain “cash-like” transactions also fall into this category, such as purchasing money orders, traveler’s checks, lottery tickets, or gambling chips. Additionally, some peer-to-peer payment transfers, wire transfers, and even foreign currency exchanges made with your credit card may be treated as cash advances.

How Cash Interest is Calculated

Cash interest begins to accrue the moment a cash advance or related transaction posts to your account, without any grace period. This immediate interest application is a significant difference from how interest is typically calculated on credit card purchases, which usually allows for an interest-free period if the full statement balance is paid by the due date.

Credit card companies commonly calculate interest daily using the “average daily balance” method. Under this method, your outstanding balance is determined each day of the billing period, including any new cash advances and accrued interest. The cash advance APR is converted into a daily periodic rate by dividing it by 365 (or 366 in a leap year). This daily rate is then applied to your average daily balance, and the resulting interest charge is added to your principal balance. This process, known as compounding, means that you can end up paying interest on previously accrued interest, leading to a quick increase in the total amount owed if the balance is not paid down quickly.

Strategies to Avoid Cash Interest Charges

The most effective strategy to avoid cash interest charges is to refrain from taking cash advances or engaging in cash-like transactions with your credit card. Due to the higher APRs and immediate interest accrual without a grace period, cash advances are an expensive form of borrowing. Exploring alternatives like personal loans, drawing from an an emergency fund, or borrowing from friends or family can be more cost-effective options for accessing cash.

If a cash advance becomes unavoidable in an emergency, it is important to repay the amount as quickly as possible. Since interest begins immediately and compounds daily, even a few days can add additional costs. Making payments beyond the minimum due, specifically targeting the cash advance balance, can help reduce the total interest paid. Always review your credit card agreement’s terms and conditions, particularly the “Schumer Box,” to understand the specific cash advance APR, associated fees, and how payments are applied to different balances. Being informed about these details can help prevent unexpected and unwanted charges.