Does Cash Advance Affect Credit Score in the Long Run

Cash advances can have a significant impact on your credit score in the long run. This is because cash advances are considered a type of debt, and taking on debt can lower your credit score.

If you're not making payments on your cash advance, it can lead to a significant increase in your debt-to-income ratio, which can further lower your credit score. This is because a higher debt-to-income ratio indicates to lenders that you're not able to manage your debt responsibly.

Cash advances can also lead to a higher credit utilization ratio, which is the amount of credit being used compared to the amount of credit available. A high credit utilization ratio can also lower your credit score. According to our research, a credit utilization ratio above 30% can negatively impact your credit score.

Readers also liked: Klover Instant Cash Advance

Taking out a cash advance can affect your credit score in several ways.

A cash advance from a credit card can raise your outstanding balance, which in turn raises your credit utilization ratio, a measure that credit scoring models take into account in calculating your score.

If you owe $500 on a card with a $1,500 limit, for example, your credit utilization ratio is 30%.

However, if you take out a $300 cash advance on that card, the balance will jump to $800, resulting in a credit utilization of more than 53%.

Generally speaking, the scoring models and lenders favor a credit utilization ratio of 30% or less.

But, if you have a higher credit limit on your card or multiple cards with their own limits, that $300 would have less of an effect on your overall ratio.

For instance, the average credit card limit for all Americans in late 2023 was $29,855, according to the credit bureau Experian, so another $300 in debt is unlikely to have much impact.

Where a cash advance could hurt your credit score is if the interest builds up to an extent that you are unable to repay it.

Curious to learn more? Check out: High Limit Credit Cards for 650 Credit Score

Cash advances come in a variety of forms, some more expensive than others.

Payday loans are a type of cash advance that can be particularly costly, with interest rates ranging from 300% to 1000% APR.

Some cash advances are secured by collateral, such as a car or home, while others are unsecured and rely on the borrower's creditworthiness.

Payday loans often have short repayment terms, typically due on the borrower's next payday, which can lead to a cycle of debt if not managed carefully.

You might enjoy: I Need Cash Now and I Have Bad Credit

To take a cash advance from your credit card, you can withdraw the money from an ATM. This is one of the most common ways to get a cash advance.

The amount you can withdraw is usually a small percentage of your credit limit. This amount will be deducted from your available credit.

You can also use a convenience check from your creditor to take a cash advance. This option comes with its own set of fees.

Alternatively, you can visit your bank branch to take a cash advance. Each of these options has its own fees associated with it.

Here are the different ways to take a cash advance and their corresponding fees:

Payday loans are a type of cash advance that can be expensive, with interest rates or fees as high as 400% APR. These loans are usually limited to $500 or less and are based on the borrower's next paycheck.

Payday loans are often issued by specialized lenders online or in local storefronts and are outlawed or restricted in many states. Some lenders offer payday alternative loans (PALs) with more affordable rates, ranging from $200 to $1,000 and needing to be repaid in one to six months.

These loans can be offered by employers as a service to their employees, often with no fees or interest charged. The Payactiv app is an example of a service used for this purpose.

Payday cash advance loans typically do not show up on your credit report, as they are part of no credit check loans.

Worth a look: Cash Advance Apps No Credit Check No Direct Deposit

Interest rates on cash advances can be steep, with some credit cards charging as high as 25% APR. This means interest starts accruing immediately, with no grace period to worry about.

Additional fees can quickly add up, including ATM fees and cash advance fees. These fees can increase the total amount of cash you owe as a cardholder, making it harder to manage your credit card balance and keep a good credit score.

Here are some key facts to keep in mind:

Credit card companies charge higher interest rates for cash advances than for regular purchases. These rates can be as high as 25% APR or more.

Interest starts accruing immediately when you take a cash advance, unlike regular purchases which often have a grace period. This means you'll start paying interest right away.

Many responsible cardholders are surprised to learn that credit card companies don't offer a grace period for cash advances. This can lead to unexpected interest charges.

Interest mounts the moment you take a cash advance, so be aware of this when using your credit card.

Here's an interesting read: Credit Cards Can Help When Paid off on Time Regularly

Additional fees can quickly add up, making it harder to manage your credit card balance and keep a good credit score. Cash advances often come with extra fees, such as ATM fees and cash advance fees.

A transaction fee, typically 3 percent to 5 percent, is always charged, regardless of how you take out a cash advance. For example, the Chase Sapphire Preferred Card has a transaction fee of 5 percent or $10, whichever is higher.

Some credit cards have identical transaction fees for cash advances. The Discover it Cash Back, Citi Double Cash Card, and Blue Cash Preferred Card from American Express all have the same transaction fee as the Chase Sapphire Preferred Card.

To avoid high interest charges, it's essential to plan for repayment and develop a clear strategy for repaying the cash advance as soon as possible. Consider alternatives like personal loans or borrowing from a family member, as they might have lower interest rates.

Recommended read: How to Avoid Cash Advance Fees

Here are some tips for managing cash advances wisely:

Taking out a cash advance can lead to a cycle of borrowing, making it harder to clear your credit card debt.

The high interest rates can cause your minimum payment to increase, significantly raising your monthly bills. This can strain your budget and lead to missed payments.

If you're not prepared for the higher minimum payments, it can negatively impact your financial health and make it difficult to secure new loans with lower cash advance interest rates.

Take a look at this: Merchant Cash Advance Rates

Taking out a cash advance can lead to a cycle of borrowing, especially if you're only making the minimum payment each month.

High interest rates can pile up quickly, making clearing your credit card debt harder. This can hurt your financial standing and make it difficult to secure new loans with lower cash advance interest rates.

A $1,000 cash advance at 30 percent APR can accrue interest of about 82 cents a day, which can add up to a significant amount over time.

For your interest: How Does Cash Advance Interest Work

Your credit card issuer may increase your minimum payment when you take out a cash advance, significantly raising your monthly bills.

If you're not prepared for this, it can strain your budget and lead to missed payments, negatively impacting your financial health.

To avoid this, aim to pay off your cash advance as fast as you can, starting from the same day you get the cash.

You can request an extension from your creditor to pay a bill, rather than getting a cash advance.

Many creditors allow their customers to pause their accounts for an agreed number of weeks or months due to financial hardship.

Talking to your creditors is a good idea to discuss your options and see if they can offer any flexibility.

You may be able to work out a payment plan to catch up on your account without affecting your credit.

It doesn't hurt to ask, and you may just gain the flexibility you need to address an unplanned expense or emergency.

If you're considering a credit card cash advance, it's worth exploring alternative options first. A cash advance can be costly, so it's best to think twice before taking one out.

Using your credit card for the purchase instead of paying with cash is a viable alternative. This way, you can still earn rewards and build credit, but avoid the cash advance fee.

Taking out a personal loan or a small Payday Alternative Loan (PAL) from your credit union is another option to consider. These loans often have more favorable terms than credit card cash advances.

Borrowing money from a friend or family member can also be a good alternative. Just make sure to communicate clearly and set boundaries to avoid straining relationships.

Here are some options to consider:

A cash advance can be a costly option, but it's a fast way to get money when you need it. You'll start accruing interest immediately, so it's essential to understand the costs involved.

To minimize these costs, take out only a small amount, as this will help you avoid accumulating interest. Paying more than the minimum each month can also help reduce the overall cost.

A cash advance can be a convenient option, but it's crucial to know the steps you can take to minimize its costs.

A fresh viewpoint: Will Paying off Debt in Collections Help My Credit Score