Credit card issuers generally offer a grace period that allows you time to pay your bill without incurring interest charges on your purchases. The grace period usually lasts two or three weeks from the end of the billing cycle, and will be incorporated into the due date on your bill. Pay your bill in full by the due date and there will be no interest charges on any of your purchases. Carry a balance over to the next billing cycle, and you will be charged interest on the remaining balance.
However, the grace period usually does not apply to cash advances. Without a grace period, interest starts accruing from the date that a transaction is posted. To avoid unexpected interest charges, you must check the terms and conditions of your credit card and adjust your payment strategy accordingly.
Credit card companies love cash advances because they generate significant income. Payment industry experts R. K. Hammer found that cash advance fees brought in $26.6 billion to card company coffers in 2016, totaling 27% of total fee income.
In addition to fees and immediate accrual of interest, cash advances usually carry higher interest rates than regular purchases. According to a recent Creditcards.com survey, 79% of cards charge more than 20% APR on cash advances, with 25.99% as the most common value.
When all of the associated charges are taken into account – fees, higher APR, and immediate application of interest – cash advances can put a serious dent in your wallet if they are not managed properly.
You can blunt the effect of cash advances by paying your balance in full as soon as possible. You don't have to wait until the billing cycle ends – you can pay your current balance at any time you have the cash to do so. Payments will be deducted from the current balance and will reduce your statement balance at the end of the billing cycle. Any interest charges that you did accrue will show in the statement balance.
If you can't pay early or pay off the balance in full, at least pay off as much as you can by the end of the billing cycle. Many cards will apply payments over the minimum amount to the highest interest rate debt. Check your card's terms and conditions to verify how payments are applied.
Keep in mind that banks may have definitions of cash balances that extend beyond ATM transactions that physically put cash into your hands. Wire transfers, money orders, foreign currency exchanges, paper convenience checks from your card issuer, overdraft protection advances, cash equivalent purchases on PayPal, and even casino gambling chips all may be considered as cash advances. (Use that knowledge to help you resist the urge to go back for another round of casino chips).
Grace periods also do not apply to balance transfers, another potentially large source of interest charges. When you make a balance transfer, you are effectively paying off one credit card with another, usually to get a better interest rate and take advantage of an introductory 0% APR period. It's unlikely you can simply pay off a balance transfer quickly in the same way you can a cash advance – otherwise, you wouldn't be making a balance transfer in the first place. Qualifying for a balance transfer card may depend on your credit score. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
In essence, a 0% APR on balance transfers is an extended grace period that applies only to balance transfer transactions, allowing you to pay off the transferred amounts in that time without accruing interest. All balance transfer offers will have limitations and some may contain fees, so make sure that you understand the terms to avoid unexpected costs.
The keys to avoiding or limiting interest charges on transactions without a grace period are fully understanding your credit card terms and planning appropriately. Cash advances are usually impulsive transactions, but you can still limit the effects by fully understanding the consequences and applying as much fiscal discipline as possible. Maybe you don't need that extra $100 in your pocket – or another round of chips that will be gone from your pocket before long.
If you want more credit, check out MoneyTips' list of credit card offers.