Do Cash Advances Hurt Your Credit Score?
Do cash advances harm your credit? Learn the nuanced ways these transactions can affect your financial standing.
A cash advance from a credit card allows you to withdraw cash directly from your available credit limit, rather than using the card for purchases. This provides quick access to funds, often through an ATM or a bank teller, and can be a convenient option in urgent situations. However, this immediate access to cash comes with specific financial implications that differ from standard credit card transactions.
How Cash Advances Impact Credit Reporting
When you take a cash advance, the transaction itself is not reported as a distinct event on your credit report. Instead, the amount borrowed is added to your overall credit card balance, appearing as part of your total revolving debt. Credit bureaus do not specifically label the transaction as a “cash advance,” so taking one does not inherently or directly lower your credit score. The impact on your credit score arises from how this increased balance affects other key credit factors.
Credit Utilization and Your Score
A significant factor in credit scoring is your credit utilization ratio, which measures the amount of credit you are currently using against your total available credit. This ratio is a percentage calculated by dividing your outstanding credit card balances by your total credit limits. A high credit utilization ratio is viewed as a higher risk by lenders and can be detrimental to your credit score. Financial experts recommend keeping this ratio below 30% to maintain a healthy credit score.
Cash advances immediately increase your outstanding balance, raising your credit utilization ratio. The sudden increase in credit used can push your utilization into an unfavorable range. Since credit utilization accounts for a substantial portion of your credit score, often around 30% of your FICO Score, an elevated ratio can lead to a decrease in your score. Managing this ratio by paying down balances promptly is key.
Repayment Difficulties and Payment History
Cash advances come with substantial fees and high interest rates, making them an expensive form of borrowing. A cash advance fee can range from 3% to 5% of the transaction amount, or a flat fee of around $10, whichever is greater. The annual percentage rate (APR) for cash advances is higher than the rate for standard purchases, often ranging from 25% to 30% or more.
Unlike regular credit card purchases, interest on cash advances begins to accrue immediately from the transaction date, as there is no grace period. These combined costs can increase the total amount owed, making the debt more challenging to repay. If these financial burdens lead to missed or late payments, your credit score can be damaged.
Payment history is the most influential factor in credit scoring, accounting for approximately 35% of a FICO Score. Even a single late payment reported to the credit bureaus, usually after 30 days past the due date, can cause a drop in your credit score. The increased financial strain from a costly cash advance can heighten the risk of falling behind on payments, negatively impacting this component of your credit profile.