Sometimes, you just need cash.
Maybe you borrowed money from an acquaintance who suddenly needs to call the loan. Maybe your car broke down on the way to work. Maybe you just came up short on bills at the end of the month.
Whatever the reason, there’s no need to feel shame. Everyone runs into a situation at some point where the money they need and the money they have just don’t line up. Often, people in these circumstances turn to a cash advance.
But just what are the consequences of taking out an advance? Can using your credit card to get that quick financial boost actually end up coming back to bite you? Will your credit score be directly affected?
If you’re considering a cash advance, read below for the full scoop.
Will a Cash Advance Hurt My Credit Score?
There’s no direct connection between a cash advance and your credit report - but it can indirectly affect the factors that determine your credit score.
When you get a cash advance from a credit card, the money being “advanced” or more technically, being “loaned” to you, increases your overall credit card balance.
Therefore, a cash advance could drastically increase your “credit utilization” ratio — which is your total amount of active debt divided by the total amount of credit. For example, if you have a credit card with a $1,000 balance of debt and the card has a total credit limit of $5,000, then your credit utilization ratio is 20%. Your credit utilization is the second largest factor in determining your credit score, and high credit utilization can negatively impact your credit score.
Many lenders prefer credit utilization to be less than 30% before giving you new credit. Here’s why:
- Suppose you only have one credit card with a $5,000 credit limit, and you have a $4,900 balance of debt. As long as you make the minimum monthly interest payment, your credit card company will absolutely love you. The simple reason: you are a profit center. Credit card companies make the majority of their money from people who carry credit card balances
- Now, suppose in the same scenario, you apply for a second credit card. The fact that you are using 98% of your available credit today, could mean that that disaster is around the corner. For example, if you lost your job, then you may not be able to make on-time payments
Intuitively, high credit utilization could also imply bad money management, impulsiveness or just the fact that you’re not earning enough money. All of those traits are “bad” signals from the lenders’ perspective.
Cash advances typically have higher interest rates than standard purchases or balance transfers. Therefore, it’s important to repay the cash advance, as soon as possible, in order to minimize the total amount of accrued interest.
Additionally, many credit card companies charge an upfront “cash advance fee” between 2% to 5% of the total amount borrowed. For example, a $500 cash advance with a 5% upfront fee, would mean that you already are in debt for $525.
A cash advance can be handy if you desperately need money right now — but like a payday loan or car title loan, a credit card cash advance can quickly lead down a debt rabbit hole that will put you into debt and could destroy your credit score.
There are other options for quick money if you don’t want to indirectly hurt your credit by using a cash advance. Here are some of the most popular and reliable options:
- Savings account. If you really need the money, and you have enough in your savings account, then use it before using a cash advance. An ATM fee is smaller than any fees your credit card will charge for a cash advance. Try to replenish your savings as quickly as possible, as this approach can easily lead to diminished savings over time.
- 401k loan. Not every employer allows you to borrow money from your 401k, but it’s a viable alternative to cash advances. Most 401k providers allow you to borrow up to 50% of your total balance or $50,000, whichever is higher. You repay interest into your own 401k account. You’ll face extra fees and taxes if you don’t repay the loan within a set time, and you might have to pay it faster if you lose your job and your employer’s 401k provider calls the loan.
- Personal loan. You can often find a personal loan with better interest rates than a cash advance. For example, this calculator from Self shows that a consumer with excellent credit can get a $5,000 loan with only 10.94% interest - far lower than the median figure of 24% for cash advances. Both online and brick-and-mortar banks offer personal loans, so you can start looking there.
- Peer to peer loans. Companies like Lending Club and Prosper offer peer to peer loans, where you can get a personal loan from an individual. Rates hover around 15%, so it’s not the cheapest alternative to a cash advance. The minimum loan is around $1,000 and you can choose between a three or five-year term.
- Sell something. Everyone has something sitting in their home collecting dust and growing less valuable every day. Comb through your attic, basement or closet to see what you can sell. It’s easier to list and sell on Craigslist, but you can usually get a better return on eBay.
- Start a side job. The advance of convenience services like Uber and Postmates means there’s a slew of gigs available for anyone willing to work odd jobs. If you only need to earn an extra $1,000 or so, sign up for a side hustle. Companies like Lyft, TaskRabbit, Instacart and others are often hiring and have few barriers to entry.
- Ask your family. Money and relationships often don’t mix, so this might be a touchy subject. If you’ve been good with money in the past, it might not hurt to ask around for a loan. Offer to sign a contract and pay interest so your loved ones know you’re serious about paying them back. You could also offer to work off part of the balance in some way.
- Start an emergency savings fund. This isn’t a way to score quick cash, but it’s the best method to avoid needing to. If you can stash away a few months worth of expenses and only withdraw from it in the case of an emergency, you’ll always have a financial cushion to use until you get back on your feet. Learn more about emergency savings accounts.
In conclusion, a credit card cash advance can be convenient, but dangerous. Learn more about building credit.
About the Author
Zina Kumok is a Financial Health Counselor and Credit Counselor, certified by the National Association of Certified Credit Counselors, who writes extensively about personal finance.