Cash advances are a way to convert credit into cash. For example, you can take out a cash advance by withdrawing money from your credit card at an ATM or by taking out a money order. This can be useful in situations where you can’t swipe your card to pay, but the convenience comes at a cost.
Cash advances tend to have expensive charges, including high fees and interest rates. Additionally, cash advances can affect your credit score by raising your utilization rate and making monthly repayments more difficult.
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How will a cash advance affect my credit?
A cash advance itself won’t affect your credit, as it won’t be reported to the credit bureaus differently than other credit card charges. However, there are two indirect ways that a cash advance can hurt your credit score:
Higher credit utilization rate
One way cash advances can hurt your credit is by raising your credit utilization rate. Your credit utilization rate is the amount of credit you’re using each month, which is calculated by dividing your outstanding balance by your credit limit. As a lower rate is better for your score, having a high outstanding balance can raise your rate and damage your credit.
Cash advances will add to your monthly balance the way any other credit card purchase would, which means they’ll raise your utilization rate. If your utilization gets too high (above 30%), it will damage your credit score.
To keep this rate low, you need to pay off most or all of your cash advance by your statement closing date, as most credit card companies report to the credit bureaus on the last day of your billing cycle (the balance they report will be used to calculate your utilization rate).
More credit card debt to pay
The other way a cash advance can damage your credit is by adding to your total debt and making it difficult to repay your bills on time.
The cost of cash advances can quickly spiral out of control, much the same way any credit card spending can. In fact, cash advances can be substantially riskier than regular spending, considering the potential fees and charges, which include:
- Higher APR: Many credit cards will charge a separate, higher APR on cash advances than on regular purchases. This means that cash advances will accumulate interest at an even higher rate than regular spending.
- Immediate interest: Most credit cards will have a grace period in which purchases do not accumulate interest. Cash advances are exempt from such grace periods, meaning that you can expect the cash advance to begin accruing interest right away.
- Cash advance fees: Credit cards charge a separate fee for cash advances, usually at a rate of 5% of the transaction amount with a $10 minimum.
- ATM fees: Many ATMs will charge additional fees for cash advances, usually around $3 or less. These fees are in addition to your credit card cash advance fee.
These charges can quickly accumulate into an unmanageable balance. Your balance determines the minimum amount you owe each month. If you fail to pay this amount by the due date, you’ll face penalties (including fees and a raised APR), as well as credit score damage.
Is it a good idea to get a cash advance?
No, it’s typically not a good idea to get a cash advance. There are other ways to get cash from a credit card that will likely cost you less money and pose a lower risk to your credit score.
High interest and multiple fees make cash advances an expensive function. Unless it’s an emergency, opt to use a debit card to withdraw money from an ATM or purchase a money order.
What should I do after taking a cash advance to protect my credit?
Sometimes, cash advances are your only option in a pinch. If you do find yourself needing to take out a cash advance, follow these steps to make sure it doesn’t end up affecting your credit score:
- Pay off as much as possible: While it might sound obvious, you should pay off as much of the cash advance from your card as possible. That amount is likely generating interest immediately and at a higher rate than other purchases.
- Pay before your statement closing date: To keep your credit utilization rate low (ideally under 10%, and definitely under 30%), you want a low outstanding balance reported to the credit bureaus. Pay off your cash advance before your statement closing date so your card issuer reports less debt to the bureaus and your utilization rate stays on the low end.
- Make all your minimum monthly payments: If you can’t pay off your cash advance in full by the statement closing date, it isn’t the end of the world for your credit. The most important action you can take is to ensure you at least make your minimum monthly payments on time, or you’ll face consequences for your finances and credit.
What are alternatives to cash advances?
It can be tricky to get physical funds on short notice. While you can keep cash advances in your back pocket as an emergency option, first consider these alternatives to get quick cash:
- Personal loans: These aren’t that quick in most cases, but you can think of them as the more “official” and legitimate version of cash advances. You can make a request with your bank for a certain amount (to be repaid over time with a fixed interest rate). They evaluate whether you are a reliable borrower and then decide whether or not to grant your loan. While this is much slower than a cash advance, it will be cheaper in the long run.
- Making purchases for friends or family: If you have friends or family looking to make purchases, you can offer to make it on their behalf using your credit card and have them pay you back in cash. This method still takes advantage of your credit card, but has the potential to earn rewards, avoid fees, and reduce interest costs.
- Debit cards: Getting access to cash anywhere without worrying about cash advance fees is arguably the best reason to own a debit card. Debit cards draw on your money as opposed to the bank’s, and as such, you’ll only need to pay a standard ATM fee to withdraw from your account.
Any one of these options will be healthier for your finances (and consequently healthier for your credit) than a cash advance, even though cash advances don’t directly harm your credit score.