A cash loan is a credit card feature that lets you withdraw funds from your bank, ATM or teller. Its effect on your credit score may be damaging, especially if you have accumulated many cash advances over an extended period. So, how do cash loans affect your credit score?
1. High-Interest Rates
The interest rates associated with cash loans are typically very high. This is true of both payday alternatives and installment loan options marketed as debt consolidation loans. Some lenders charge up to 400% APR. These high rates translate into monthly payments that can be difficult to make and total interest costs that can double or triple the amount borrowed. Consumer advocates have long supported limiting interest rates on payday loans, and some states now restrict them.
Experts like MaxLend mentioned that taking out a cash advance will increase the amount you owe, one of the three factors that make up your credit score. The other two are credit mix and new credit, which show how often you borrow and whether or not you pay it back promptly. For instance, if you avail of a cash advance, it raises your credit utilization ratio to more than 30%, which may hurt your score temporarily.
2. High Fees
Cash advance loans typically have a high fee structure, making it difficult to repay. Moreover, most payday loan borrowers need help to repay the loans on their next paycheck and end up renewing the loans, leading to a continuous cycle of debt. Credit card cash advances are loans people can obtain from their accounts. Depending on the credit card issuer, these can be accessed via ATM or teller and have a limited limit. These loans usually have a higher interest rate than those charged on regular purchases and also have a separate cash advance fee.
Cash advances may only directly affect your credit score if it increases the balance on your card to a high percentage of the total available credit, impacting your credit utilization ratio. However, if you are paying cash advances frequently, it could be a sign to lenders that you need more funds to meet your other obligations, and they may not advance your additional credit in the future.
3. Failure to Repay
Cash advances are often a last resort for people in financial trouble. If you can’t repay a cash advance on time, it can impact your credit score for years. Cash advances with credit cards frequently have interest rates greater than those charged for regular purchases, and interest may even start building immediately. Cash advances can also raise your credit utilization rate, hurting your score—lenders like that you use under 30% of your available credit.
Your credit score will probably suffer if you take out a cash advance and push yourself past this limit. For these reasons, it’s best to avoid cash advances unless necessary. However, if you’re a responsible borrower who uses cash advances only for emergencies, you may be safe from seeing your credit score drop.
4. Late Payments
The good news is that payday alternative loans usually have consumer protections and low-interest rates. However, even these loans will cost you if you pay all of the payments. A few days late won’t typically affect your credit, but if you’re more than 30 days behind on your repayment schedule, the lender will likely report your delinquency to all three national credit bureaus.
Repeated late payments can damage your credit score for seven years. This means you’ll be a high-risk borrower, making qualifying for credit at competitive interest rates harder. The amount also owed factors into your score, as does the percentage of revolving accounts, like credit cards, versus installment accounts, such as personal MaxLend loans.
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