What is a cash advance?

A cash advance is a short-term loan from a bank or alternative lender. The term also refers to a service provided by many credit card issuers that allows cardholders to withdraw a certain amount of money. Cash advances typically carry high interest rates and fees, but they are attractive to borrowers because they also feature quick approval and funding.

Types of cash advances

There are a variety of cash advances, but the common denominators for all are high interest rates and fees.

Credit card cash advances

The most popular type of cash advance is borrowing against a credit card line of credit. Money can be withdrawn from an ATM or, depending on the credit card company, from a check deposited or cashed at a bank. Credit card cash advances usually carry a high interest rate, even higher than the rate on regular purchases: you’ll pay an average of 24% – about 9% more than the average APR for purchases. In addition, interest begins to accrue immediately; there is no grace period.

These cash advances usually include a fee, either a flat rate or a percentage of the amount advanced. Also, if you use an ATM to access money, you will often be charged a small usage fee.

In addition to separate interest rates, credit card cash advances have a separate balance from purchases on credit, but the monthly payment can be applied to both balances. However, if you only pay the minimum amount due, federal law allows the card issuer to apply it to the balance with the lowest interest rate. Since this is invariably the purchase rate, the cash advance balance can stay and accrue interest at this high rate for months.

In most cases, credit card cash advances are not eligible for interest-free or low-interest introductory offers. On the plus side, they are quick and easy to obtain.

Cash Advances to Merchants

Merchant cash advances refer to loans received by businesses or merchants from banks or alternative lenders. Typically, businesses with less than perfect credit use cash advances to finance their operations, and in some cases these advances are paid with future credit card receipts or with a portion of the funds that the company receives sales on its online account. Rather than using a business’s credit score, alternative lenders often assess its creditworthiness by looking at multiple data points, including the amount of money the merchant receives through online accounts such as PayPal.

Payday loans

In consumer loans, the term “cash advance” can also refer to payday loans. Issued by special payday lenders, the loans can range from $50 to $1,000, but they come with fees (around $15 per $100 borrowed, and even more in some cases) and interest rates above 100%. Rather than considering the borrower’s credit score, the lender determines the loan amount based on local state regulations and the size of the applicant’s paycheck. If the loan is approved, the lender returns the money to the borrower; if the transaction takes place online, the lender makes an electronic deposit into the borrower’s checking or savings account.

Loans are very short-term – they must be repaid on the borrower’s next payday unless they wish to extend the loan, in which case additional interest is charged. Unfortunately, many do: More than 80% of all payday loans roll over within 30 days of the previous loan, according to a 2014 study by the Consumer Financial Protection Bureau (CFPB).

The process can be quicker, though more complex, than getting a credit card cash advance. To get a payday loan, you write a post-dated check payable to the lender for the amount you plan to borrow, including fees. The lender immediately issues the borrowed amount but waits to cash your check until payday arrives. Some e-conscious lenders are now asking borrowers to sign an automatic repayment agreement from their bank accounts. Lenders usually ask you to provide ID and proof of income when you apply.

Some employers offer payday loans or payday advances as a service to their employees. Terms vary, but often no fees or interest are charged.

Are cash advances hurting your credit score?

Taking out a cash advance has no direct impact on your credit or credit score, but it can affect it indirectly in a variety of ways.

First, if you take the advance using a credit card, it will increase your outstanding balance, which will increase your credit utilization rate, a measure that credit score models use to calculate your score. If you owe $500 on a $1,500 limit card, for example, your credit utilization rate is 30%. However, if you take out a $300 cash advance on this card, the balance will increase to $800, resulting in a credit utilization of over 53%. High utilization rates are an important indicator of credit risk; when your ratio exceeds 40%, it can have a negative impact on your credit score.

As stated earlier, a cash advance usually has a high interest rate. If it affects your ability to pay monthly fees quickly, it could also affect your credit score. And if the cash advance takes you over the card’s credit limit, your credit rating may be affected. Even after the balance is paid off, your credit report will show the highest reported balance, and other potential lenders will see that you went over the limit at some point, which could affect your ability to get new credit.

Advantages and disadvantages of cash advance

A credit card cash advance might be a reasonable option for someone who urgently needs money and has limited resources to get it, especially when that person has a clear and reasonable plan for repaying the money. in a short time. It is, for example, a better option than a payday loan or a car title loan, due to the exorbitant triple-digit interest rates these loans typically carry and the greater repayment flexibility that comes with it. credit card debt.

But cash advances would be a bad idea under these conditions:

• Just before declaring bankruptcy – New credit card debt does not magically disappear in the event of bankruptcy. Your creditors and a judge will review your debts, including dates and types. Once you know or have a strong tendency to declare bankruptcy soon, any credit card use can be considered fraudulent. A cash advance immediately before deposit is very likely to be disputed by the card issuer, and this account may be excluded from debts that are canceled in the event of bankruptcy.
• To pay a credit card bill – A cash advance is a very expensive way to pay bills and the risk of falling into revolving debt cannot be ignored. The possibility of paying several times the amount of the initial advance (in interest costs) is very real. Plus, on top of the higher interest rate, there are those extra fees that everyday credit card purchases aren’t subject to.
• To buy something you can’t afford – Going into debt to satisfy a desire is not only financially dangerous; it’s emotionally damaging. A person who thrives on immediate gratification and the temporary emotional uplift of a big purchase will eventually experience regret (and possibly depression, anxiety, stress, and other debilitating emotions) in the face of debt – the more compulsive the purchase, the greater the regret.

The essential

Cash advances are not alarming when used infrequently, but they are at best short-term solutions for dealing with emergencies. If they become a habit or you find that you regularly need a cash advance to make ends meet, drastic changes in budgeting and spending are in order.