Can a Cash Advance Actually Help Your Credit?

When you’re in a financial bind and you need some quick cash, taking out a cash advance on your credit card is a solution that might be worth considering but is less than ideal. Sure, they don’t come with the ludicrously high interest rates and short repayment terms of a payday loan, but they’re still much costlier than just maintaining an emergency fund.

If you’re living paycheck to paycheck, you should also consider how a cash advance will affect your credit score. After all, a higher score will lead to lower (i.e. better) interest rates down the line, which means a rosier financial outlook overall.

But how does a cash advance affect your credit score? Is there a chance that it could even help your score in the long run? (If you're curious for all of the details on cash advances, check out the TheLending guide What is a Cash Advance?)

A cash advance is a loan you take out on your credit card.

When you make a normal purchase on your credit card, that amount you spend is added to your total balance. The same is true when you take out a cash advance, the only difference being that you receive cash instead of a purchased item. If you were to take out a $60 advance, you would receive $60 in cash and $60 would be added to your total balance.

When it comes to repaying your cash advance, nothing changes from how you would regularly pay down your balance. Ideally, you should pay off your balance in full every month, but your monthly minimum payments would only marginally increase with a cash advance added to your total versus a regular purchase.

A cash advance is convenient, but it’s much more expensive than just using your card.

However, there are some very important differences between cash advances and regular credit card transactions. For one, a cash advance comes with a higher interest rate than normal transactions. The difference will vary from card to card and from customer to customer, but the average credit card APR  is a bit over 16% while the average cash advance APR is almost 24%. That’s a big difference.

Second, there is no way to avoid paying interest on a cash advance. With a standard credit card transaction, there is a 30-day grace period before interest starts to accrue. This is why it’s so important to pay your credit card off every month; it means borrowing money interest-free! But with a cash advance, interest starts accruing immediately. While it’s still a good idea to pay off your cash advance as soon as you can, there’s just no way to avoid paying interest.

Lastly, you’ll typically get charged a fee for taking out a credit card cash advance. And it’s not a tiny fee either. The average cash advance fee is usually something like $10 or 5%, whichever is higher. That means that a $500 cash advance would cost $25 right off the bat!

Does a cash advance have any effect on your credit score?

Luckily, a cash advance won’t have any real effect on your credit. They aren’t recorded separately from other credit card transactions on your credit report, so the credit scoring algorithms have no way of knowing what’s a cash advance and what’s a regular transaction. All they’ll see is a higher credit card balance.

If you’re sensing a “but” coming, you are correct. Because, while cash advances won’t get noted on your credit score, a higher credit card balance will get noted and could possibly hurt your score if it grows too large. Your total amounts owed makes up 30% of your credit score, so taking out $1,000 cash advance and adding that thousand dollars to your balance could definitely lower your score.

And a cash advance definitely won’t help your score. Taking out additional debt and paying more money towards interest just means higher balances and less room in your budget to pay them down. In theory, paying off a cash advance would help your score since it will get noted in your payment history (which makes up 35% of your score) but it’s not really going to have any effect. Failing to pay your bill on time, however, will have an immediate negative effect.

Some “cash advance” loans are actually payday loans in disguise.

There are several types of no credit check loans that like to call themselves “cash advance” loans, possibly to make them seem more like credit card cash advances. But don’t be fooled.

While some bad credit loans, particularly installment loans, can be a useful way to cover emergency expenses, predatory no credit check loans are anything but. These loans come with much higher interest rates and significantly shorter payment terms, and they pose a much greater risk to your financial future.

These loans are typically payday loans or title loans, which can carry annual interest rates anywhere between 250 and 500%. They’re meant to be paid back in a single lump sum payment, usually only a few weeks to a month after the loan was first borrowed. These factors—high rates and short terms—can make these loans exceptionally hard to pay back on-time.

These predatory “cash advance loans” could really hurt your score.

Here’s the thing: These lenders don’t mind that. In fact, they stand to make a lot more money this way! If you can’t pay their cash advance loan back on time, they can let you roll the loan over—extending the due date in return for paying additional fees and interest. The more you roll the loan over, the more money the lender makes, all without the customer getting any closer to paying off the original loan.

While most of these lenders don’t report their loans to the credit bureaus—meaning that the loans themselves won’t affect the borrower’s credit score—the cycle of debt that these loans can create will certainly affect a person’s creditworthiness. More money going towards interest on a payday loan means less money for other bills and necessary living expenses. Defaulting on your gas bill because you rolled over your payday loan will ding your score for sure!

Plus, defaulting on a sketchy bad credit loan could mean getting sent to collections. And that collections agency will definitely report you to the credit bureaus. It’s pretty much a lose-lose!

While credit card cash advances are far from a perfect financial solution—and will not help raise your credit score—they are far preferable to “cash advance loans” that are really just payday loans in disguise.