Credit scores are an essential part of personal finance in today's world. They are used by lenders and creditors to determine your creditworthiness and assess the risk associated with lending you money. Therefore, it is essential to maintain a good credit score if you want to obtain loans, credit cards, and other financial products at favorable rates. However, there are many factors that can impact your credit score, including withdrawing cash from your credit card.
In this article, we will discuss the impact of withdrawing cash from your credit card on your credit score and provide guidance on the best course of action.
How do cash advances work?
Before we delve into the impact of cash advances on credit scores, it is essential to understand how they work. A cash advance is a feature offered by credit card companies that allows you to withdraw cash from an ATM or a bank branch using your credit card. Cash advances are different from regular credit card transactions because they are treated as loans and carry higher interest rates and fees.
When you take a cash advance, the amount you withdraw is added to your credit card balance, and interest is charged on the total amount. Additionally, cash advances usually come with a higher interest rate than regular credit card purchases, and the interest starts accruing immediately, unlike regular purchases that have an interest-free grace period.
Will credit card cash withdrawals be visible on my credit file?
One of the most common questions people ask about credit card cash withdrawals is whether they will be visible on their credit report. The answer is yes. Just like any other credit card transaction, cash advances will be reported to the credit bureaus and will be visible on your credit report.
Your credit report is a record of your credit history, including all your credit accounts, balances, payment history, and other relevant information. Therefore, any cash advances you take will be recorded on your credit report, and potential lenders and creditors will be able to see them.
Will credit card cash withdrawals damage my credit score?
Now that we know that cash advances are visible on your credit report, the next question is whether they can damage your credit score. The answer is that it depends.
Cash advances themselves do not directly impact your credit score, but they can indirectly affect it in several ways. For example, if you take a cash advance and do not pay it back on time, your credit score will be affected negatively. This is because your payment history is one of the most important factors in determining your credit score.
Additionally, cash advances can increase your credit utilization ratio, which is another crucial factor in calculating your credit score. Your credit utilization ratio is the amount of credit you have used compared to your credit limit. If you take a cash advance and add it to your credit card balance, your credit utilization ratio will increase, which can have a negative impact on your credit score.
Lastly, cash advances can also hurt your credit score if you take them frequently or if you are using them to cover your regular expenses. This can signal to potential lenders that you are having financial difficulties, which can make them hesitant to lend you money.
How Can Credit Card Cash Withdrawals Affect My Chances of Securing Credit in the Future?
As mentioned earlier, cash advances can indirectly affect your credit score, which in turn can impact your chances of securing credit in the future. If you take cash advances frequently and do not pay them back on time, potential lenders may view you as a risky borrower, which can make it difficult to obtain loans or credit cards at favorable rates.
Additionally, cash advances can affect your debt-to-income ratio, which is another factor that lenders consider when evaluating your creditworthiness. Your debt-to-income ratio is the amount of debt you have compared to your income. If you take too many cash advances and add them to your credit card balance, your debt-to-income ratio will increase, which can make it difficult to qualify for loans or credit cards.
Withdrawing cash from your credit card can impact your credit score in several ways. While cash advances themselves do not directly damage your credit score, they can indirectly affect it by increasing your credit utilization ratio, hurting your payment history, and signaling financial difficulties to potential lenders.
Therefore, it is essential to use cash advances sparingly and only when necessary. If you find yourself relying on cash advances to cover your regular expenses, it may be time to reassess your budget and look for ways to reduce your expenses.
Finally, if you are struggling with debt or financial difficulties, it is always a good idea to seek the advice of a financial advisor or credit counsellor. They can help you develop a plan to get back on track and improve your credit score over time.