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Do cash advances hurt your cedit score?

Do Cash Advances Hurt Your Credit Score?

Updated on October 23, 2022


Almost all financial transactions can adversely affect your credit score, but that only happens when they are not adequately managed. So, it's fair to say that they are not bad depending on how well you manage them. A cash advance is one of the very few financial transactions that can seriously hurt your credit score; however, its adverse effects are often overlooked by a lot of people and thus, always seen as a good choice for an emergency financial bailout. Before going ahead to answer the question of how do cash advances hurt your credit score, you might need to know more about what they are.

What Is a Cash Advance?

A cash advance or cash advance loan is a financial service provided by almost all issuers of a credit card. It's a short term loan that you charge against your credit card. Usually, most people see a cash advance loan as a way of dealing with a shortage of funds to cover their expenses.

How Does a Cash Advance Work?

The way cash advances work is easy. It allows cardholders to withdraw cash, either via an ATM or through the teller at a bank or any other financial agency. The amount obtainable usually has a limit. In general, a particular percentage of your credit limit is what you are allowed to withdraw. In most cases, only a few hundred dollars can be withdrawn this way. However, cash advances always have a fee for the amount you borrow. This is also known as a cash advance fee, and it's usually a percentage of the sum borrowed which is in addition to any teller or ATM fees you are charged for the transaction. Unlike in the case of regular credit card purchases, the interest compounds daily beginning from the day the cash is borrowed and the rates are often higher than those of the interest for regular purchases made on the credit card. So, it's safe to say the terms and conditions applicable to a cash advance loan are different from that of regular credit cash transactions.

Notably, the process of getting a cash advance loan itself does not answer the question of how do cash advances hurt your credit and this is because direct cash lenders do not usually run a credit check during the application process. This means the process of requesting for a cash advance loan would not have any direct effect on your credit score. What they prefer to do is make inquiries about your current employment status as well as your source of income. Also, lenders make it compulsory for you to submit a post-dated check so that once funds from your employer are paid into your account on payday, the amount of the loan you are to pay at that time gets instantly covered.

How Exactly Do Cash Advances Hurt Your Credit?

At this point, you should be quite curious about how cash advance loans can damage your credit score in the light of the points explained above. 'Does a cash advance help your credit? What are the better alternatives to bad credit cash advance loans? These and many more are the relevant questions we will attempt to answer here.

It should be noted that cash advance loans do not hurt your credit history directly as credit reports do not indicate when a cash advance is taken against a credit card account. Nevertheless, since cash advance loans incur high interest rates and additional fees, they can cause the balance on your account to grow rapidly. This, therefore, makes it hard to keep up with monthly payments. Once your credit card balances continue to go up, or you find it hard to pay off the payday loan when due, you might start seeing the adverse effects on your credit report and credit scores.

•Your inability to repay the loan in due time

According to a report by the Consumer Financial Protection Bureau in 2014, it is believed that more than 80% of people who get payday loans, such as a cash advance, do not repay them on payday. Rather, they just renew for another period which attracts a new fee. Also, in above 80% of situations whereby these loans are renewed, their size and interest rate will most likely go up the longer the loan cycles are extended. Also, according to the Centre for Responsible Lending, an average cash advance loan borrower remains in his debt for even longer, and this could be about 212 days of the year.

What is the essence of these? If care is not taken, you will find it tough to repay your loan and might eventually get more loans, further compounding the interest on the loans. So in this respect, how exactly do cash advances hurt your credit? Well, here is it; if you fail to repay your cash advance loan, it might be sold to a debt collection agency. And, many of the debt collectors or collection agencies often report accounts in collection to the major national credit bureaus; thus, earning you a bad credit score.

On another note, when you have failed to repay your cash advance loans, a debt collectors or the cash advance lender could charge you to court to recover the unpaid loans. If you fail to appear or lose the case or perhaps fail to pay the amount mandated by the court against you, it will be recorded on your credit report and can impact the score for as much as seven years.

•Its effect on future loans and approval

Another way to know how to find the best cash advance is by considering its long-term impact on future loans approval. Simply put, too much advance loans accumulated over an extended period could seriously dent your chances of getting a loan or approval in the future. According to the Consumer Financial Protection Bureau (CFPB), this is because some specialty credit reporting agencies can collect some of your loan history and thus, lenders can get access to the information. Organizations that are meant to give you loans or approval will doubt your credibility; thus, you might be denied the chance to get loans or approval.

•Its effect on making each of your paychecks smaller

Several payday loans, such as a cash advance, make each of your paychecks smaller. The downside of this is that you won't be able to take care of your bills based on your monthly income anymore since repaying every bit of the loans you get must include the interest or fees, making it difficult for you to get out of the trap of cash advance loan.

What to Do When You Cannot Repay Your Loan

When you have taken a cash advance loan and realized that you cannot repay it when due, it is better for you to do something about it. Ignoring to pay will only compound your woes; thereby, affecting your credit even further. Advisably, you should contact your lender as early as possible to make repayment plans or make other arrangements to your benefit. This will prevent the loan from going into default and damaging your credit score. The only downside to this is that such other repayment arrangements would most likely add more fees and interests which might even make the loan harder to pay.

Exploring Reasonable Alternatives to Cash Advance Loans

You could do well by totally avoiding having to worry your head about finding answer to question 'do cash advances hurt your credit score' by considering other short-term and long time options that can help you to cover your unexpected expenses. It is advised that you should first exhaust these other options before contemplating going for a cash advance loan.

First, when you are completely short of cash to cover some immediate expenses, you could consider borrowing little cash from a friend or family member. This will likely not attract any interest and you get to pay back at a convenient time. Again, you could also consider making cuts to the variable expenses in your budget. When you do this, some funds get freed up for you to take care of certain emergent or necessary expenses. Furthermore, you could consider getting a loan directly from a financial institution of your local trade union. This is also a good long-term alternative to cash advance loans online.

Final words

Cash advance loans, as earlier suggested, are not necessarily bad except if they are improperly managed and thus, hurting your credit score. This is not exclusive to instant cash advance loans alone as it is obtainable with every financial transaction. As such, you should avoid being in a position of having to worry about knowing how do cash advances hurt your credit, and explore every other alternative possible as the terms and conditions applicable to them are generally different from those of other regular credit card purchases. You should only go for a cash advance loan when you have unsuccessfully explored such other alternatives.