In life, you may sometimes find yourself in a tight spot financially. It can be a major headache, especially if no options help you.
One possible solution is a cash advance, which comes with its own risks. So, what is a cash advance, and do cash advances hurt your credit?
You should ask these questions before you decide to go down this route. Let's dive into the details and understand the risks of cash advances.
A cash advance is a short-term loan. It allows you to access money quickly, with lenders often requiring no credit check and limited documentation.
Often, cash advances are used to cover unexpected expenses or bridge the gap between paychecks. They can also cover day-to-day expenses like groceries and utility bills.
Cash advances are usually more expensive than traditional loans due to higher interest rates and associated fees. However, they are often attractive for those needing quick cash.
A cash advance is a loan you take out against your available credit limit. It usually comes with a high-interest rate and fees, so it should only be used in an emergency when other options are unavailable.
When you take out the cash advance, the money is taken directly from your credit card balance and deposited into your bank account. Then, you have to pay back the loan plus interest and fees.
Here are five major types of cash advances:
A credit card cash advance is a loan you take out against the credit limit on your credit card. It’s generally a short-term loan designed to provide quick cash in an emergency or other situation when you need it most.
It is beneficial if you have a high credit limit since you can access the funds more quickly than going through a traditional bank loan.
However, it's important to note that this type of cash advance usually comes with high fees and interest rates. It means the amount you borrow can quickly add up, especially if you don't pay it back on time.
Additionally, some credit cards have a very low or no-cash advance limit, so you may need help accessing all the funds you need for your emergency situation.
Payday loans are short-term loans, typically ranging from $100 to $1,000, which can be used for immediate cash needs. These loans often have high-interest rates and fees, making them an expensive way to borrow money.
Payday loan lenders generally do not consider your credit history or require a credit check when processing the loan application. However, they often rely on other factors, such as employment and income, to approve the loan.
A line of credit cash advance is when you withdraw money from your line of credit account. You can take out a line of credit cash advance in-store or at an ATM.
The amount of money you can borrow depends on the size of your line of credit. It is useful for those with limited funds and needing an immediate influx of cash.
An employer cash advance is taken out against a paycheck. This type of cash advance can be beneficial if you need to make an unexpected purchase, but it does come with risks.
Employer cash advances are not reported to credit bureaus, so they will not affect your credit score in the short term. However, if you do not repay the loan on time or at all, it could lead to additional fees and wage garnishment from your employer.
An online cash advance is a short-term loan that allows you to borrow money quickly without using your credit cards or taking out a traditional bank loan. The lender typically offers the funds electronically and deposits them into your bank account within one business day.
Online cash advances come with high fees, but they can be a convenient way to access quick financing in case of an emergency.
Most banks and credit card companies offer cash advances, but be sure to read the fine print carefully before agreeing to one. Cash advances tend to carry higher interest rates than purchases so they should only be used as a last resort because they can quickly add up and hurt your credit score when managed incorrectly.
Additionally, here are some factors that can further impact your credit score when taking a cash advance:
Cash advances usually increase the amount of debt you carry relative to available credit (your utilization ratio) in two ways:
This can cause your utilization ratio to go up dramatically since a large cash advance will represent a much larger percentage of your available credit than smaller purchases.
The higher your utilization ratio is, the more it will negatively affect your credit score. A high utilization rate suggests that you are relying too heavily on borrowed money and may be at risk of defaulting on payments.
Payments to your cash advance lender will be reported to credit bureaus and can impact your payment history.
Making payments on time could positively affect your score since it shows that you are keeping up with your financial obligations. However, failing to make payments and the cash advance going into collections will likely hurt your credit score.
When it comes to a cash advance, the average length of time that you've had credit accounts open matters. With a new account, this can hurt your credit score, especially if you have few other sources of positive information to offset it.
Conversely, the longer your credit history, the better off you'll be, even when you have a cash advance in your history.
As mentioned, cash advances should be considered a last resort when you need money immediately. If you're in a financial bind, there are better alternatives than taking out a cash advance.
Here are some options to consider:
The most obvious alternative to a cash advance is withdrawing money directly from your bank account. While you may incur fees from the ATM, these are usually much lower than the fees associated with a cash advance. Withdrawing money from your account also has no impact on your credit score, as it does not require any additional borrowing.
Of course, it should start with you having extra money from your savings or emergency funds. During financially sunny days, it is always a good idea to start building your emergency fund in case of any financial storms.
This way, you can avoid relying on a cash advance when the time comes.
Rather than taking out a cash advance on your credit card limit, you might be better off using the card to purchase what you need. Credit cards are typically more secure than cash advances, and they also come with rewards you may not get with a cash advance.
There is usually no additional cost associated with using your credit card, and if you pay off the balance in full each month, it can help build your credit history.
For big-ticket purchases, you can even look for zero-interest installment plans offered by some retailers. This can help you spread out the cost of your purchase over a few months without incurring any additional fees or interest charges.
In some cases, negotiating with creditors can help avoid taking out a cash advance. This may involve renegotiating the terms of a loan, such as extending the repayment period or restructuring payments.
This is helpful if you need help to make your payments on time, as it can give you more flexibility in how and when you pay off a loan. However, this may only be an option for some, depending on their credit history or other factors.
One alternative that might work for some is loaning from their 401(k) or Roth IRA. While there will still be tax implications, the interest rate tends to be lower than with cash advances, and you don't have to worry about damage to your credit score since it's technically a loan from yourself.
Just be sure to pay the loan back within the specified period of time, or you could end up owing penalties for early withdrawal.
Another option to consider is borrowing from family and friends. While it might be more difficult to talk about your financial situation with someone you know, the terms of a loan may be much more favorable than those of a cash advance.
Often, family members or close friends are willing to lend money without charging interest if you set up a repayment plan that works for both parties.
Of course, be responsible and honor your repayment agreement. Not doing so could damage relationships with those you care about and put them in a difficult position if something unexpected happens to you or the loan is not repaid.
A personal loan from a bank or credit union can be a better option than taking out a cash advance. Personal loans typically have lower interest rates and more flexible repayment terms than cash advances, which can help you avoid long-term debt problems.
You can also secure a personal loan with no fees or collateral required, giving you the flexibility to use the money in whatever way is most beneficial for you.
Credit unions, in particular, often offer lower interest rates than banks, and they may have more lenient terms for those with bad credit. If you’re considering a personal loan, be sure to shop around to find the best deal.
Cash advances can be risky for those who don't understand the implications of taking out such a loan. While they may seem like an easy way to get some quick cash, the reality is that they can have serious consequences on your credit score and future financial health.
It's important to consider all factors before deciding to take out a cash advance to ensure that it won't leave you worse off.
Consider the alternatives to a cash advance, such as using credit cards or taking out a loan from friends, family, or credit unions. These options may be more affordable and less risky in the long run.
If you're looking for funds to cover an emergency expense, 121 Financial Credit Union can provide access to the funds you need without risking your credit score. Get in touch today to learn more about your options.