Does Cash Advance Hurt Credit Score?

A cash advance doesn't directly hurt your credit score. The transaction itself isn't reported to credit bureaus as a specific type of activity. But that doesn't mean it's risk-free for your credit health.

Let's break down what actually happens when you take a cash advance and how it might affect your credit score in the long run.

What is a cash advance anyway?

A cash advance is a short-term loan from your credit card. It lets you withdraw actual cash against your credit limit, either from an ATM, at a bank, or by using those convenience cheques that sometimes come with your credit card statement.

How cash advances indirectly affect your credit score?

While the cash advance transaction itself doesn't show up on your credit report, here's what might impact your score:

Higher credit utilization

When you take a cash advance, you're using more of your available credit. If this pushes your credit utilization ratio (how much credit you're using compared to your total limit) too high, especially above 30%, your credit score could take a hit.

Potential payment problems

Cash advances are expensive.

They usually come with:

• Higher interest rates than regular purchases

• Interest that starts immediately (no grace period)

• Cash advance fees (often 5% or $10, whichever is higher)

These costs make your balance bigger and harder to pay off.

Other downsides of cash advances

Even if your credit score stays intact, cash advances can cause other financial problems:

• Immediate interest: Unlike regular purchases, interest starts accumulating the moment you take the cash.

• Higher Annual Percentage Rate (APR): Cash advance interest rates are often much higher than regular purchase rates, sometimes around 29%.

• Extra fees: You'll usually pay a transaction fee plus any ATM fees if you use one.

A real-life example

Let's say you take a $500 cash advance. Your card charges a 5% fee ($25) and a 29% cash advance APR. If you pay it back in one month, you'll pay about $12.69 in interest.

That means your $500 ends up costing you $537.69. If you can only pay $50 each month, it would take a year to pay off and cost you $112.98 in interest and fees.

Better alternatives to cash advances

Before heading to the ATM with your credit card, consider these options:

• Use your emergency fund if you have one

• Ask friends or family for a short-term loan

• Look into personal loans with lower interest rates

• Talk to your employer about a salary advance

What about merchant cash advances?

These are different from personal cash advances. They're used by businesses to cover short-term cash flow problems. They work differently and aren't related to personal credit cards.

Think twice

Cash advances won't immediately damage your credit score. But they're expensive and can lead to debt problems that might eventually hurt your credit.

They're a bit like fast food—quick and convenient, but not great for your long-term financial health. If you absolutely need one, try to pay it off as quickly as possible to minimize the interest costs.

And remember, it's always better to have an emergency fund ready for unexpected expenses instead of relying on credit.