Are Cash Advances Bad for Your Credit?

A cash advance involves withdrawing cash against your credit card’s available credit limit, functioning much like a short-term loan. While offering immediate access to funds, cash advances are generally detrimental to an individual’s financial health and credit standing.

Impact on Credit Score

A cash advance can negatively affect a credit score. One significant factor is credit utilization, the amount of credit used compared to total available credit. A cash advance immediately increases the outstanding balance on a credit card, consequently elevating the credit utilization ratio. Credit scoring models, such as FICO, weigh credit utilization as a substantial component, typically accounting for 30% of the score.

Lenders and credit bureaus view a higher credit utilization ratio as an increased risk, suggesting that an individual might be over-reliant on credit. Financial experts generally recommend keeping this ratio below 30% to maintain a healthy credit profile. An increased balance from a cash advance can push this ratio higher, signaling potential financial distress and potentially leading to a lower credit score.

Furthermore, a cash advance adds to an individual’s overall debt burden, which lenders consider when assessing creditworthiness. The nature of a cash advance as a high-cost borrowing method can be perceived as a sign of poor money management. Payment history, accounting for 35% of a FICO score, is the most influential factor. Any difficulty in making timely payments on the cash advance, or any missed payments, would severely harm the credit score.

Understanding the Financial Costs

Beyond the impact on credit scores, cash advances carry substantial direct monetary costs. The Annual Percentage Rates (APRs) for cash advances are typically significantly higher than the APRs for standard credit card purchases. This elevated interest rate means that the borrowed amount accrues interest at a much faster pace.

Interest on cash advances begins accumulating immediately, unlike most credit card purchases that offer a grace period. Interest on a cash advance begins accumulating from the moment the transaction is completed, with no interest-free period. This means that even if the advance is paid off quickly, interest charges will still apply for the days the balance was outstanding. This lack of a grace period significantly increases the overall cost of borrowing.

In addition to high interest rates, cash advances incur specific transaction fees. These fees are commonly structured as a percentage of the advanced amount, or a flat fee, whichever is greater. The combination of these upfront fees and immediate, higher interest accrual can make it very difficult to repay a cash advance quickly, potentially leading to a persistent debt cycle where the balance grows rapidly.

Key Differences from Credit Card Purchases

Cash advances differ from standard credit card purchases due to fundamental differences in their terms. A primary distinction lies in interest accrual. While many credit card purchases benefit from a grace period, allowing cardholders to avoid interest if the full statement balance is paid by the due date, cash advances offer no such grace period. Interest on a cash advance begins accruing immediately from the transaction date.

Another significant difference is the Annual Percentage Rate. Cash advances consistently carry a higher APR than regular credit card purchases on the same card. For instance, a card might have a purchase APR of 18%, but its cash advance APR could be 25% or even 30%. This higher rate means that borrowing cash is inherently more expensive than using the card for everyday spending.

Moreover, cash advances are subject to dedicated transaction fees that are not associated with typical credit card purchases. These fees are commonly structured as a percentage of the advanced amount, often ranging from 3% to 5%, or a flat fee, such as $10, whichever is greater. These upfront fees add to the immediate cost of the transaction. Financial institutions also tend to view cash advances as a red flag, indicating potential financial instability, whereas responsible use of a credit card for purchases, with timely payments, is generally seen as positive for creditworthiness.