Does a Cash Advance Affect Your Credit Score?

A cash advance generally refers to a short-term, high-interest loan providing immediate funds. These advances come in various forms, such as borrowing against a credit card’s limit or obtaining a short-term loan from specialized lenders. While offering quick access to money, understanding their credit score implications is important. Their structure and repayment affect financial standing.

How Cash Advances Appear on Your Credit Report

A cash advance does not directly create a separate negative entry on a credit report or immediately lower a credit score. Its recording depends on the type. For credit card cash advances, the borrowed amount is added to the existing credit card balance, increasing the outstanding debt on that revolving credit account. This means the transaction is not uniquely flagged as a cash advance, but rather as an increase in the credit card’s overall balance.

Other cash advances, like payday loans or certain title loans, may be reported differently, or not at all, to credit bureaus. Many payday lenders do not perform hard credit checks or report on-time payments. However, if repayment fails, the debt might be sold to a collection agency, which could then report the delinquency, severely damaging the credit score. Defaulting on title loans can lead to vehicle repossession, and any remaining debt sold to collections would then appear on the credit report.

The Indirect Influence on Your Credit Score

While a cash advance may not be a direct negative mark, it can indirectly influence your credit score. A primary concern is its impact on credit utilization, the amount of credit used compared to total available credit. A credit card cash advance increases your outstanding balance, significantly raising your credit utilization ratio. This ratio accounts for about 30% of a FICO Score; keeping it below 30% is recommended for a healthy credit score.

Cash advances come with high interest rates and fees, which can exacerbate debt. Credit card cash advances have higher Annual Percentage Rates (APRs) than regular purchases, and interest begins accruing immediately without a grace period. Payday loans can have finance charges ranging from $10 to $30 for every $100 borrowed, equating to very high APRs, sometimes nearing 400% or more. These added costs make repayment more challenging, potentially leading to financial strain.

The increased debt burden heightens the risk of late or missed payments. Payment history is the most important component, making up about 35% of a FICO Score. A single late payment reported after 30 days can cause a substantial drop in credit scores and can remain on the credit report for up to seven years.

For non-credit card cash advances that appear as new accounts, there can be a temporary impact on the average age of accounts. Opening new accounts can lower the average age of credit history, a minor factor in credit scoring. Additionally, some applications for non-credit card cash advances may involve a hard inquiry on the credit report, which can result in a small decrease in the credit score. Hard inquiries remain on the credit report for up to two years, though their impact fades after 12 months.

Factors Determining the Extent of the Impact

The magnitude of a cash advance’s indirect credit score impact depends on individual circumstances. The amount of the advance relative to available credit is an important factor. A larger cash advance, especially on a credit card, can cause a more pronounced increase in credit utilization, leading to a greater negative effect on the score. If a cash advance pushes utilization above the recommended 30% threshold, the score drop could be substantial.

Repayment behavior plays an important role in mitigating or exacerbating negative effects. Prompt and full repayment minimizes adverse impacts, allowing credit utilization to return to a lower level quickly. Conversely, any delay in repayment or defaulting on the advance can trigger negative consequences, including late payment marks or collection accounts, which have a lasting negative effect on credit.

An individual’s existing credit profile influences how a cash advance will affect their score. Someone with high credit utilization or a history of missed payments may experience a greater decline in their score compared to someone with excellent credit and low existing debt. The presence of multiple credit accounts and a long credit history can absorb the impact of new credit or increased utilization more effectively.

The frequency of obtaining cash advances can signal financial distress to lenders. Repeatedly relying on cash advances indicates an inability to manage finances without high-cost borrowing, which can lead to a pattern of elevated credit utilization or payment difficulties. This pattern can further erode an individual’s credit standing over time, making it harder to secure more favorable credit options in the future.