Most credit cards offer the option to take a cash advance. Some card issuers send out blank checks you can write that, when cashed, will operate as a cash advance. Others provide a pin number so you can easily take out cash at an ATM or while checking out at the grocery store. Others allow you to go to the bank, swipe your card, and walk out with money. No matter the mechanism, taking out a cash advance is something you should consider carefully because of the consequences. If you’re rebuilding your credit after bankruptcy, you should be extra cautious of using a cash advance.
Taking a Cash Advance Won’t Directly Hurt Your Credit Score
The first thing to know is that taking a cash advance will not directly drop your credit score. So, you can breathe easy if you need to take a few hundred dollars on one of your cards in an emergency. There’s no instant and associated penalty on your credit report for using a cash advance. However, there are other consequences of taking cash from a card that can come back to bite you.
Using Cash Advance Increases Utilization
One way that using a cash advance can indirectly lower your credit score is by increasing your utilization. This is calculated as the percentage of your available credit that you’re tapping. If you have $5,000 in total credit line across all your cards and carry no balances month to month then take a $500 cash advance, that’s not too big a deal.
That $500 represents the use of 10% of your credit line and is not high enough to trigger a ding to your credit score. However, given the same credit lines, if you’re carrying $1,500 in card debt and take out $500 in cash, that bumps you to $2,000 which is 40% credit utilization which is way too high and will lower your credit score. So, mind your balances.
Taking Cash From a Card Comes at a Higher Interest Rate
It’s also important to remember that a cash advance doesn’t operate like a regular credit card purchase. Most credit cards offer one interest rate for purchases and a much higher one for cash advances. So, while paying your cell bill with your credit card comes with an average interest rate of about 15%, cash advances run one to seven percent higher (but can be much more depending on the card).
This means you can be charged 16%-22% for a cash advance but with some cards, cash advance interest is much greater. If you must take a cash advance, paying it off ASAP before your statement cuts should avoid the interest charge. Taking a cash advance should be treated as a big decision and one to use only when no other less-costly option is available.
Upfront Cash Advance Fees Are Common
In addition to the steeper interest rate, many cards charge a fee to access the cash advance feature. You can be slapped with a $10-$20 cash advance fee that’s tacked onto your card balance immediately. In some cases, the cash advance may be even higher – the ten to twenty mentioned here is an average. Your card provider may assess a much steeper upfront charge.
That charge is on top of the interest charge, and itself will accrue interest. So, for instance, if you take out a $100 cash advance and your lender assesses a $20 fee, right away that’s a 20% premium charge, and then interest charges pile up on top of that. If you don’t pay the cash advance back ASAP, there’s no telling how much that $100 will cost you in the long run.
Cash Advances Should Be Avoided When Possible
Because of the higher interest rates and fees associated with cash advances, they should be avoided when possible. If you need cash to pay a utility bill, why not pay the bill using your card instead of taking out cash? That way you’ll only pay standard interest. If you need to pay someone back or loan them money in a crunch, consider sending money through PayPal funded through your credit card. That way it’s like a standard purchase rather than a cash advance.
As with any credit card purchase, paying off the balance ASAP, before interest accrues is the best route to avoid getting in over your head with credit card debt and racking up costly interest. Did you know you can pay off your balance before the statement cuts? You can easily access your card accounts online and pay through the issuer’s website a few days before the statement closes to avoid interest charges.
To find out more about rebuilding your credit after bankruptcy, contact Credit Score Keys for a free consultation. Call 844-659-3226 today to talk to one of our credit experts.