Understanding Cash Advances and Their Impact on Your Credit

At O1ne Mortgage, we prioritize consumer credit and finance education to help you make the best financial decisions. If you have any mortgage service needs, feel free to call us at 213-732-3074. In this blog, we will explore the concept of cash advances, their impact on your credit, and some alternatives that might be more beneficial for your financial health.

What Is a Cash Advance?

A cash advance is a feature offered by many credit cards that allows you to borrow cash against your credit limit. You can obtain a cash advance in several ways: by visiting a participating financial institution, using an ATM with a special PIN provided by your card issuer, or cashing “convenience checks” that come with your card. However, the amount you can withdraw as a cash advance is usually limited by your cardholder agreement and is typically less than your total credit limit.

When you take a cash advance, the amount is added to your credit card balance along with a cash advance fee, which is often 5% of the borrowed amount or $10, whichever is greater.

Does a Cash Advance Hurt Your Credit?

Cash advances are treated the same as regular credit card transactions on your credit report. This means that the balance on your credit card will increase by the amount of the cash advance, plus any fees and accumulated interest. This increase in balance affects your credit utilization rate, which is the balance expressed as a percentage of your credit limit. High credit utilization, especially above 30%, can negatively impact your credit scores.

Here are some reasons why cash advances can affect your credit more severely than regular transactions:

Higher Interest Rate

The interest rate on cash advances is typically higher than the rate on regular purchases. This can lead to a higher overall balance on your credit card.

No Grace Period

Unlike regular transactions, which often have an interest-free grace period if paid off in full by the due date, cash advances start accruing interest immediately. This means that interest charges begin accumulating the day the cash advance is issued and continue until the advance is repaid in full.

Potentially Repaid Last

If you have an outstanding balance on your credit card when you take a cash advance, your payments may be applied to regular transactions first, which usually have lower interest rates. This means that the cash advance balance, with its higher interest rate, may not be paid off as quickly, leading to more interest charges and a higher overall balance.

Alternatives to Cash Advances

If you need cash, consider these alternatives, which might be easier on your wallet and better for your credit utilization:

Private Loan

Borrowing money from a friend or family member can be more affordable than a cash advance. Make sure to agree on repayment terms and any interest charges, and stick to them.

Personal Loan

An unsecured personal loan can be a good alternative, especially if you have good credit scores and can qualify for a low fixed interest rate. Personal loans provide a lump-sum payment that you repay in regular monthly installments over a set period, typically ranging from two to seven years. Interest rates on personal loans vary, so compare them with what you might pay on a cash advance.

Personal Line of Credit

A personal line of credit is a type of revolving credit account available from many banks and credit unions. It allows you to withdraw cash or write checks against a set borrowing limit and repay in monthly installments. You pay interest only on the outstanding balance. Lines of credit typically have a fixed lifespan of up to 15 years, after which they are closed, and any remaining balance must be repaid.

Peer-to-Peer (P2P) Loan

P2P loans are issued through web-based platforms where individual investors fund loans in relatively small amounts. These loans offer quick approval and distribution of funds. While P2P lenders may not always check credit scores, they usually require evidence of income and other assets. Interest rates depend on the lender’s assessment of your ability to repay the debt.

Home Equity Loan

If you own a home and have significant equity, you may qualify for a home equity loan or a home equity line of credit (HELOC). These loans use your house as collateral and often offer lower interest rates compared to cash advances. However, the application process can take several weeks, and failure to repay could result in losing your home.

The Bottom Line

A credit card cash advance can be a convenient source of money in a pinch, but it can also lead to higher interest charges and increased credit utilization, which can hurt your credit scores. If you need a cash loan, consider alternatives like personal loans, lines of credit, or borrowing from friends and family.

At O1ne Mortgage, we are here to help you navigate your financial options. For any mortgage service needs, call us at 213-732-3074. Checking your credit score and taking steps to improve it can help you qualify for better rates and terms on any loan you consider.