Does Withdrawing Cash From Credit Card Affect Credit Score?

Withdrawing cash from a credit card, known as a cash advance, can seem like a convenient solution for immediate financial needs. This action allows an individual to access physical currency from their credit line rather than making a typical purchase. Understanding how a cash advance impacts one’s credit score is important for anyone considering this option.

Understanding Cash Advances

A cash advance differs significantly from standard credit card purchases. When taking a cash advance, individuals typically incur immediate costs, including a transaction fee. This fee is often a percentage of the amount withdrawn, commonly ranging from 3% to 5%, or a flat fee, such as $10, whichever is greater. In addition to the fee, cash advances usually carry a higher Annual Percentage Rate (APR) compared to the APR for regular purchases. Unlike purchases, cash advances generally do not have a grace period, meaning interest begins to accrue from the transaction date.

How Credit Scores Are Determined

Credit scores, such as FICO Scores and VantageScores, are numerical representations of an individual’s creditworthiness. These scores are calculated based on various factors within a credit report, each carrying a different weight. Payment history is typically the most significant factor, accounting for approximately 35% of a FICO Score and around 40-41% for VantageScore. The amount owed, or credit utilization, is the second most important factor, making up about 30% of a FICO Score and 20% of a VantageScore. Other factors include the length of credit history (15% for FICO, 21% for VantageScore 3.0), new credit (10% for FICO, 5% or 11% for VantageScore depending on the model), and credit mix (10% for FICO, 20% for VantageScore 3.0).

Direct Effects on Your Credit Score

Taking a cash advance directly impacts your credit score primarily through its effect on credit utilization. A cash advance immediately increases the outstanding balance on the credit card. This increased balance raises the credit utilization ratio. A high credit utilization ratio, generally considered to be above 30%, is viewed negatively by credit scoring models and can significantly lower a credit score. This impact is immediate once the transaction is reported to credit bureaus.

While the act of taking a cash advance itself does not directly appear as a negative mark on payment history, the higher balance and immediate interest accrual can make repayment more challenging. If an individual struggles to pay off the cash advance and subsequently misses payments, this will severely damage their credit score. Late payments can remain on a credit report for up to seven years. The difficulty in managing the increased debt from a cash advance can therefore lead to negative entries on payment history.

Broader Financial Implications

Beyond the direct impact on credit scores, cash advances carry significant financial implications. The combination of upfront fees and immediate, often higher, interest rates makes cash advances a very expensive form of borrowing. For instance, a $500 cash advance could incur a $25 fee and accrue substantial interest, potentially costing over $500 to repay depending on the APR and repayment timeline. This high cost can make it difficult to manage the debt, potentially leading to a cycle of borrowing to cover previous advances.

Relying on cash advances can also signal to lenders a potential sign of financial distress or poor money management, even if not explicitly reflected in credit score calculations. Lenders may use such observations when making future lending decisions. The overall financial strain imposed by high-cost cash advances can make it harder to secure favorable terms on future loans or credit.