Can interest charges on a high-interest cash advance continue indefinitely?

You need to pay more than the minimum every month in order to pay down your cash advance balance

The Fine Print with Fred Williams

Fred O. Williams is senior reporter for CreditCards.com. A business journalist since 1987, his work has appeared in Kiplinger's Personal Finance magazine, the Buffalo News and USA Today.

Can interest charges on a high-interest cash advance continue indefinitely?

Yes – because of a quirk in credit card law, you could wind up paying interest on a cash advance for years, costing many times the original loan amount.

The problem is caused by making only the minimum monthly payment and carrying a purchase balance as well as a cash advance balance.

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"I took $250 out as a cash advance in 2012," Maria Ureste wrote in a question to CreditCards.com. After taking a closer look at her statement, she discovered most of her interest charges are for that single transaction six years ago. "Chase is telling me I never paid over the minimum due, [which] is why the $250 never got paid down."

How is this possible?

See related: Clarifying rules for how card payments are applied to balances

Like most big card issuers, Chase's general-purpose credit cards calculate a minimum monthly payment equal to last month's interest plus 1 percent of the balance. If that interest-plus-1-percent formula results in a total less than $25, then the minimum payment is set at $25.

The formula is designed to prevent interest charges from continuing forever. By paying down a fraction of the balance every month – however small – the balance would eventually be paid off.

But there's a catch.

What the law says about payment allocation

"The payment allocation rules in the Credit CARD Act require credit card issuers to apply payments above the minimum payment to the highest interest balance," said Chi Chi Wu, senior counsel at the National Consumer Law Center, in an email interview. "But issuers are permitted to apply the minimum payment to lowest interest balance."

They can, and they do. In the "payment allocation" section of Chase's card agreement, you'll find this explanation: "When you make a payment, generally, we first apply your minimum payment to the balance on your monthly statement with the lowest APR. Any payment above your minimum payment would generally then be applied to the balance on your monthly statement with the highest APR first."

In other words, you need to pay more than the minimum payment to extinguish a higher-interest balance, especially if you also use the card for purchases.

NCLC calls this a "significant weakness" of the payment allocation rule, in a written analysis of the CARD Act. Card users who can only afford to pay the minimum are the ones most at risk of being trapped in an endless cycle of high-interest charges.

In online card agreements, Chase says the APR on cash advances is 26.74 percent. That's more than the highest stated purchase APR of 25.49 percent. Both the purchase APR and cash advance APR can vary with changes in market interest rates.

According to CreditCards.com's 2017 annual cash advance survey, the average cash advance APR was 23.68 percent. That was almost 8 percentage points higher than the average purchase APR of 15.79 percent.

Tip

Tip: To extinguish a cash advance balance, you should pay more than the minimum payment due. Look for the cash advance balance on your statement, and add that amount to the minimum payment due – or pay off the full balance, if you can afford to. Then check the online account, or next month's statement, to make sure the cash advance balance was extinguished. Read "How to minimize the cost of a cash advance" to learn more.

How payment allocation rules can work against you

To see how the payment allocation rule works against you when you pay only the minimum, consider a card with a purchase balance of $1,000 and a cash advance balance of $250 – the amount Ureste took out in 2012.

  • At the average APR for purchases and cash advances, the monthly minimum payment would be about $31.25, using the interest-plus-1-percent formula. Of that, $18.75 would be interest and $12.50 would reduce the balance.
  • But under the allocation rule, the $12.50 would be subtracted only from the purchase balance, leaving the $250 cash advance balance untouched.
  • The next month, it doesn't take many purchases to get the purchase balance back up to $1,000, allowing the scenario to repeat indefinitely.

Paying more than the minimum, however – even only a small amount – will wipe out the cash advance balance eventually. For a $250 advance, paying $25 a month over the minimum should wipe out the high-interest balance in 10 months.


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Updated: 10-17-2018