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How Does a Cash Advance Affect Your Credit?
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When you’re in a financial bind and out of options, you may consider getting a cash advance on your credit card. A cash advance is basically a small loan — you’re borrowing cash from your credit account. Before choosing this route, you should take a moment to understand the potential impact it can have on your finances and your credit.
Getting a cash advance is easy. You can use your credit card to get cash from an ATM or a bank teller, or cash one of those blank checks your credit company sends you, also known as convenience checks. But there are risks involved. In addition to charging you a fee — either a flat rate or a percentage of the advance — your credit company will likely charge a higher interest rate on the advance than it does on purchases. Your limit for cash advances may also be separate and lower than your credit limit; check with your credit company for the details on your account.
How does a cash advance affect your credit?
Like any use of your credit cards, a cash advance can affect your credit score, especially if you aren’t careful about how much money you obtain and when you pay it back.
- Cash advances won’t ding your credit up front. Simply taking a cash advance won’t affect your credit — it doesn’t register separately on your credit report.
- There is no grace period. When you make a purchase with your credit card, you get a “grace period” of at least 21 days before you are charged interest on that purchase. This is not the case with cash advances. You usually are charged interest from the moment you take the advance, so even if you pay your credit card bill in full by the due date, you’ll still be paying some interest. It may hurt your credit if that extra amount hinders you from repaying your balance quickly.
- Watch out for your credit utilization ratio. To stay in good standing with the credit rating agencies, you should maintain a good credit utilization ratio, the ratio of your debt to your overall credit limit. A ratio under 30% is generally considered good. A cash advance can harm your credit score if it pushes your ratio too high.
- Watch out for high balances. Keeping high balances on your credit cards is one of the worst things you can do for your credit score, so cash advances will work against you in this regard. Avoid letting a cash advance significantly increase your credit card balance unless there’s no other choice.
All things considered, a cash advance is usually not credit-score friendly. Taking out a cash advance should be a last-resort way to obtain money, since the rates and fees for doing so are high. If you’re getting money this way, it probably means you’re desperate to cover an emergency expense, which means it may take you months to repay the advance. During those months, interest builds up, your credit utilization ratio remains high and your credit score could begin to fall.
If you are struggling with your spending and your credit, it’s a good idea to get help, such as working with a reputable credit repair company or signing up for LendingTree’s free credit monitoring service to help you stay on track. Improving your credit score takes dedication, but doing so will eventually pay off in financial benefits and peace of mind.
More ways to get cash
A cash advance is a high-cost way to get cash fast. Before you go down this road, consider other options for getting the money you need. Here are a few ideas:
- Sell some possessions online. Letting go of some things using Craigslist, Letgo, eBay or another online buy-sell platform can be a quick way to make a buck. It has the added benefit of helping you clean out your space.
- Hold a yard sale. Yard sales are a great option if you have a lot of small, random items that could bring in some money but would be difficult to list online and ship to buyers. And who knows, you might even meet some new neighbors.
- Get a side gig. More and more people are earning money from side gigs these days, whether that means driving for Uber or Lyft, doing little jobs on TaskRabbit or taking on some freelance clients in your field. This can be a great way to make real money.
- Reduce your 401(k) contribution. One way to have more money in your pocket is to save less of it. While it’s usually a good idea to prioritize saving for retirement, there may be times when you need to dial it down so you can use the cash for more immediate needs. Just don’t forget to dial it back up when you are able.
- Take a personal loan. Even though it’s best to obtain the cash you need without paying interest on it, taking a personal loan could be a cheaper way to borrow cash than getting a cash advance on your credit card. This is especially true if you have good or excellent credit.
A cash advance is an expensive way to access cash and can pose a danger to your credit score if you’re not careful.
This option is best for those moments when you need physical cash beyond what you can get with your debit card, but that you will nonetheless be able to pay back quickly. For example, a cash advance could help if you’re buying a used item from a yard sale and your paycheck hasn’t hit your account yet.
But such instances are few and far between. Most of the time, it’s best to consider a cash advance your last resort, no matter how tempting it may be.