Do Cash Advances Have an Interest-Free Grace Period?
Using a credit card can be tricky. One the one hand, they’re a great way to rack up awesome points and rewards, and they can also help smooth over those “two days till payday” blues. On the other hand, they’re also a great way to rack up excess debt on your card, which will hurt your credit score and leave you stuck with lots of interest.
The key to using credit cards responsibly is to make sure you pay them off within the 30-day interest-free grace period. That way, you’re basically getting those points or miles for free! But if you think the same thing applies to credit card cash advances, think again.
How do credit cards work?
When you take out a credit card, you’re basically opening a revolving line of credit. You’re given a maximum amount that you can borrow on the card—known as your “credit limit”—and you can borrow as much or as little against that limit as you like.
Any time you make a transaction on the card, the amount that you paid is added to your balance. That balance then accrues interest as determined by the card’s Annual Percentage Rate, or APR. The higher the balance, the more money will accrue in interest.
Every month, you will be required to make a minimum payment on the amount you owe. The formula for that minimum payment varies from card to card, but it’s often something like “$15 plus 2%.” Because the monthly minimum amount is so small, it can take several years—or often much longer—to pay off a credit card if you are only making your minimum payment.
Almost all credit cards do, however, come with a 30-day interest-free grace period before interest starts to accrue on a given transaction. Pay off that balance within 30 days and you won’t be charged any interest!
What about credit card cash advances?
When you make a transaction on your credit card, no cash changes hands. You simply swipe the card at the grocery store or enter the card’s information online and the funds are all transferred electronically.
However, you can use a credit card to get cash if you really need it. Simply visit an ATM or a bank teller and you can charge a cash withdrawal to your card. The amount you charge is added to your total balance—just like any other credit card transaction—while you receive that same dollar amount in physical cash. (For information about all cash advances—no just credit card cash advances—check out the OppU article What is a Cash Advance?)
Do cash advances have a grace period?
No, they do not. When you take out a cash advance on your credit card, interest begins to accrue on that transaction amount immediately. The sooner you pay off that balance, the less interest will accrue, but this does mean that you can’t take out a credit card cash advance without paying at least some amount of interest.
And that’s not the only way that a credit card cash advance will prove more expensive. First, you will usually be charged an additional fee simply for making the transaction. Second, most cash advances have a separate, higher APR from regular credit card purchases. Not only will interest start accruing immediately, but more interest will accrue overall.
Unless you absolutely need cash and need it now, it’s best to avoid taking out a cash advance on your credit card.
What about other types of cash advances?
There’s another type of cash advance besides the kind you can take out on your credit card. These cash advances are a kind of short-term no credit check loan that you could get from a storefront lender or check-cashing establishment—or even take one out as an online loan.
Basically, they’re the same thing as payday loans.
These cash advance loans definitely don’t come with an interest-free grace period. In fact, that’s not even how they accrue interest. Finance charges for these types of personal loans are generally calculated as a flat rate and don’t accrue over time.
Let’s say you take out a $300 two-week cash advance loan with a 15% interest rate; your interest charge of $45 will be immediately added to the amount you owe. This means that paying off the loan early won’t save you any money at all.
The rates on these loans are much higher than the rates for credit card cash advances. The APR for a credit cash advance might be something like 23%, while that 15% charge on a two-week cash advance works out to an APR of almost 400%!
Furthermore, the lump-sum repayment terms for these short-term loans make them very difficult for many people to repay. That’s how they end up reborrowing the loan rolling it over, paying only the interest owed and extending the due date complete with a new interest charge. It can be all too easy for these borrowers to become trapped in a dangerous cycle of debt.
Save up cash for a rainy day.
While a cash advance might be a marginally safer bad credit loan option than, say, a predatory title loan or an overdraft free, that doesn’t mean it’s actually a good option.
You might do better with a bad credit installment loan, but the best thing you can do is save up a cash emergency fund. That way, you won’t have to take out any debt at all to cover emergency expenses!