Financial emergencies can leave you scrambling for quick cash, and turning to a cash advance might seem like the most convenient solution. But did you know that a cash advance may have an impact on your credit score?

In this blog post, we’ll explore how cash advances work and their effect on credit scores and discuss alternative options for emergency funding.

Does Cash Advance Impact Credit Score?

Cash advances do not directly impact credit score but can indirectly affect it by increasing credit card debt and utilization ratio.

Utilization Rate

One crucial factor that affects your credit score is the utilization rate, which refers to the ratio of your outstanding credit card balance compared to your total credit limit.

For example, let’s say you have a credit card with a $5,000 limit and currently owe $1,500 on it. Adding a cash advance of $2,000 would increase your balance to $3,500 – pushing up your utilization rate from 30% to 70%.

This significant jump in utilization could lead to a drop in your overall FICO® Score since lenders may see you as financially stressed.

Late Or Missed Payments

Experiencing financial emergencies may prompt you to consider a cash advance as an immediate solution. However, it is crucial to understand how late or missed payments can significantly impact your credit score.

Your payment history significantly determines your FICO® Score, accounting for 35% of your overall credit rating.

Falling behind on payments results in hefty fees and leaves a negative mark on your credit report for up to seven years, ultimately lowering your score. For instance, if you were unable to pay off an outstanding balance from a cash advance and it went into default status after multiple late payments, debt collection agencies could start contacting you.

Stay diligent when managing repayments for any type of borrowed money – including cash advances – because missed or delayed payments can lead to long-lasting consequences that affect not only your short-term finances but also influence lenders’ perception of your overall financial responsibility and trustworthiness.

Multiple Cash Advances

Relying on multiple cash advances can negatively impact your credit score and overall financial situation. This is because each cash advance gets added to your outstanding credit card balance, ultimately affecting your credit utilization ratio—an essential factor in determining your FICO® Score.

For example, imagine you’ve taken out three separate cash advances within a short time frame due to various unforeseen emergencies. Not only are you now facing substantial fees and interest rates for all three loans, but these combined debts make up a significant portion of your available credit limit.

Consequently, having several cash advances may jeopardize future loan approvals and remain on your record for up to seven years if not properly managed. In worst-case scenarios, it might even push some borrowers into bankruptcy or force them into taking additional loans just to make ends meet—ultimately leading to an endless cycle of debt that’s difficult to escape from.

Different Types Of Cash Advances

Various types of cash advances are available, including credit card cash advances, cash advance apps, credit builder apps, merchant cash advances and payday loans.

Credit Card Cash Advances

Using your credit card to get a cash advance may seem like an easy fix for financial emergencies, but it can come with high fees and interest rates. Credit card cash advances usually carry a separate cash advance APR, which is typically higher than the purchase APR.

Additionally, you’ll have to pay a cash advance fee of around 5% of the amount borrowed, plus any ATM or bank fees.

It’s important to note that borrowing too much through credit card cash advances can also increase your credit utilization ratio and temporarily lower your score. This could lead creditors to see you as more at risk of defaulting on payments in the future and negatively affect your creditworthiness overall.

Cash Advance Apps

I’ve recently discovered there are cash advance apps available that offer a better alternative to payday loans with high-interest rates and predatory fees. These apps, such as Gerald, provide instant cash without the hassle of traditional lending institutions.

Some have a monthly subscription fee but offer additional features like bill tracking, cashback rewards, and FDIC-insured checking accounts. It’s crucial to note that interest charges on these types of loans can add up quickly if not paid back promptly.

However, they can be a helpful solution for emergency expenses when used responsibly.

Credit Builder Apps

Credit builder apps are designed to help users build their credit scores, making them a great alternative to cash advances. These apps work by reporting users’ on-time payments to the major credit bureaus, which in turn can positively impact their credit history and overall score.

Using these types of apps can provide you with a more structured way of building your credit without having to worry about high fees or interest rates associated with cash advances.

Additionally, managing your finances through these apps can help you stay organized and on top of your bills, ultimately helping improve your financial situation in the long run.

Merchant Cash Advances

Merchant cash advances (MCAs) are short-term business loans that utilize future credit card sales to access funding. MCAs can be an expensive way to borrow money, as they typically come with high fees and interest rates.

In fact, some financial experts warn that MCAs can lead small businesses into debt traps, making it difficult for them to stay on top of bills and negatively impacting their credit score.

If you’re considering an MCA, it’s important to research your options carefully and choose a lender that offers transparent terms and fair repayment plans.

Payday Loans

I know that payday loans can be tempting when you need cash fast, but they come with some serious risks. Payday loans are short-term loans with high fees and interest rates often exceeding 100%.

Late payments or defaulting on a payday loan can negatively impact your credit score and lead to debt collection agencies. While it may seem like a quick fix for emergency funding, better alternatives, such as personal loans or borrowing from friends and family, are available.

How Cash Advances Work

Cash advances allow users to withdraw a portion of their credit limit in the form of cash or funds transferred directly into their bank account, with interest rates and fees applied immediately.

Interest Rates And Fees

As a cash advance user, it’s important to understand the interest rates and fees associated with this type of borrowing. Cash advances typically come with high fees, including a cash advance APR that can be much higher than the regular APR charged on regular purchases, which means you’ll pay more in interest charges.

In addition to this, there is usually a cash advance fee of 5% of the amount advanced or $10 (whichever is higher), and an ATM or bank fee.

It’s crucial to keep in mind that the interest on cash advances begins accruing immediately after you receive the funds, and there is no grace period like you have for regular credit card purchases.

To avoid these high costs, consider exploring other options for borrowing money before resorting to a cash advance.

Repayment Terms

Repayment terms for cash advances can be confusing and overwhelming, especially with the high fees and interest rates involved. Understanding the repayment schedule before taking out a cash advance loan is important.

Generally, repayment terms for most cash advance loans are short-term, ranging from two weeks to a month.

Additionally, it’s crucial to understand the penalties of missing or late payments as they can compound quickly along with high-interest costs. If you miss or delay your payments on your cash advance loan, it can negatively impact your credit score.

Alternatives To Cash Advances

Instead of resorting to a cash advance, consider alternatives like personal loans, borrowing from friends or family, payday alternative loans, and get-paid-early apps.

Personal Loans

As a cash advance user, you may not know that personal loans are an alternative to high-interest payday loans and credit card cash advances. Personal loans are unsecured loans that offer lower interest rates and longer repayment terms than cash advance options.

When considering a personal loan, shopping around for the best rates and terms is important. Check with local banks or credit unions for competitive offers. Also, make sure you understand all the costs involved, such as origination fees or prepayment penalties if applicable.

Borrowing From Friends Or Family

Sometimes, borrowing from people you know can be a better alternative to cash advance loans. If you have friends or family members who can lend you the money, it’s worth considering this option first.

Unlike cash advances, borrowing from loved ones doesn’t come with high fees and interest rates that could put you in deeper debt.

When borrowing from friends or family, make sure to communicate your plans for repayment clearly and honestly. Stick to the agreement you made with them so as not to damage your relationship when it comes to finances.

It could also be helpful to put everything in writing just in case there are misunderstandings down the line.

Payday Alternative Loans

If you’re looking for a better option than traditional payday loans, consider applying for Payday Alternative Loans (PALs). PALs are short-term, small loans that offer lower fees and APRs than typical payday loans.

These loans are offered by federal credit unions to their members who have been with them for at least a month.

For those who need quick cash, opting for PALs over payday loans can save borrowers from the exorbitantly high-interest rates that often come with the latter. Moreover, seeking these alternative options could also improve your chances of loan approval in the future since multiple payday loan applications may harm one’s credit score.

Get-Paid-Early Apps

As a cash advance user, you may have heard of get-paid-early apps as an alternative to traditional cash advances. These apps allow you to access a portion of your upcoming paycheck before payday without charging interest or fees.

Some examples include Earnin and Even.

Get-paid-early apps can be a great option if you need emergency funds and don’t want the negative impact of a traditional cash advance on your credit score. Plus, they offer convenient features like bill tracking and automatic repayment.

Just remember that these options should only be used for short-term financial assistance and not relied on regularly.

Our Takeaway

In conclusion, while cash advances may seem like a quick fix to financial emergencies, they come with high fees and interest rates. Although taking out a cash advance does not directly impact a credit score, failing to pay it back on time or utilizing too much of the credit limit can lower one’s score.

Exploring other alternatives before considering a cash advance loan and managing them properly is essential to avoid debt collection and a bad credit score.

Does Cash Advance Affect Credit Score (FAQs)