Cash advances can be a quick solution when you need immediate funds. However, while they offer quick access to cash, they can significantly affect your credit score.
Understanding how a cash advance works and how it impacts your credit report can help you make informed financial decisions. In this article, we’ll explore the effects of cash advances on your credit score, their long-term impact, and how you can minimize any negative consequences.
What Is a Cash Advance and How Does It Work?
A cash advance is a short-term loan you can take out against your credit card’s available balance. You can typically access it by withdrawing cash from an ATM, using a convenience check, or requesting the funds directly from your credit card issuer.
However, unlike regular credit card purchases, cash advances come with higher fees, interest rates, and no grace period, meaning interest starts accruing immediately.
The convenience of cash advances can make them tempting. Still, their high cost and immediate repayment terms often make them a more expensive option than other forms of borrowing, such as personal or even payday loans.
How Does a Cash Advance Show Up on Your Credit Report?
Cash advances appear on your credit report in two ways. First, they are listed as part of your credit card balance, which means they are reflected in your overall credit utilization ratio—the percentage of your total available credit that you’re using. High credit utilization can negatively impact your credit score.
Second, when you take out a cash advance, it shows as a separate transaction on your credit card statement, and some lenders may flag it as high-risk financial behavior. Although the cash advance doesn’t appear as a distinct item on your credit report, the increased debt and potential for higher credit utilization show up.
Does Taking a Cash Advance Lower Your Credit Score?
Yes, taking a cash advance can lower your credit score, though the extent of the impact varies depending on several factors:
- Credit Utilization: Credit utilization is one of the most significant factors in your credit score. If a cash advance significantly increases your balance relative to your credit limit, it will raise your credit utilization ratio. Generally, a higher utilization rate (above 30%) can hurt your score.
- High Interest and Repayment Issues: Because cash advances often come with high interest rates, you may find it more challenging to repay the amount quickly, which can lead to carrying high balances month-to-month. Over time, this can further hurt your credit score as revolving debt grows.
- Additional Fees: Cash advances incur transaction fees added to your outstanding balance. These fees can increase the amount you owe and further increase your credit utilization ratio.
What Are the Long-Term Effects of Cash Advances on Credit?
The long-term effects of cash advances on your credit can be more significant than the immediate impact. If you frequently use cash advances or fail to pay them off quickly, you could face several negative consequences:
- Increased Debt: Repeated use of cash advances can lead to unmanageable debt, especially when combined with high interest rates and additional fees. This ongoing debt can result in a higher overall credit utilization ratio, continuously harming your credit score.
- Creditworthiness: Lenders may view frequent cash advances as a sign of financial instability. If they see you relying on these advances regularly, it may suggest that you’re unable to manage your finances effectively. This perception can lower your creditworthiness, making qualifying for loans, mortgages, or rental agreements harder.
- Difficulty in Paying Off Balances: Because cash advances typically come with higher interest rates than regular credit card purchases, you may find it challenging to make a significant dent in your balance, leading to a cycle of debt.
How Can You Minimize the Impact of a Cash Advance on Your Credit?
If you’ve taken out a cash advance or are considering one, there are several steps you can take to minimize its impact on your credit score:
- Pay It Off Quickly: Since interest on cash advances starts accruing immediately, it is essential to pay off the balance as quickly as possible. Doing so will help prevent excessive interest charges and keep your debt from growing.
- Keep Credit Utilization Low: Keep your credit utilization ratio below 30%, even after taking out a cash advance. You can achieve this by paying down other balances or requesting a credit limit increase to reduce the impact of the advance on your utilization rate.
- Use Cash Advances Sparingly: Avoid relying on cash advances as a regular form of borrowing. If you need access to cash frequently, consider alternative forms of credit, such as personal loans, which typically have lower interest rates and fees.
- Monitor Your Credit Report: Regularly check your credit report to ensure that your credit utilization ratio is healthy and that all cash advances and repayments are accurately reflected.
Conclusion
While cash advances provide immediate access to funds, they can hurt your credit score if not appropriately managed. The impact stems primarily from increased credit utilization, higher interest rates, and additional fees. Beem’s Everdraft™ provides instant cash advances without interest. Beem helps users cover unexpected expenses before payday. It offers a flexible and fee-free alternative to overdraft protection.
However, by paying off cash advances quickly, minimizing credit utilization, and using them only in emergencies, you can reduce the potential harm to your credit score. Careful financial planning and responsible credit management are key to maintaining a healthy credit profile.
People Also Ask
Does a cash advance hurt your credit score?
Yes, a cash advance can hurt your credit score if it increases your credit utilization ratio or you cannot repay the balance quickly. This leads to higher interest payments and a growing balance.
How much does a cash advance affect your credit score?
The extent to which a cash advance affects your credit score depends on your overall financial situation, including your current credit utilization and ability to repay the advance quickly. High utilization can cause a more significant dip in your score.
How long does a cash advance stay on your credit report?
A cash advance will remain part of your credit card balance until paid off. While the transaction doesn’t appear separately on your credit report, the increased balance and its effect on your credit utilization will persist until the debt is fully repaid.