Do Cash Advances Hurt Your Credit?

What’s a cash advance?

Cash advances are a type of quick lending that gives you money in less than 24 hours. There are three main types of cash advances available:

• Credit card: With a credit card cash advance, you borrow against your available credit. If you have a $1,000 credit limit, then that’s the upper limit of what you can borrow, which decreases as your balance increases. You typically take cash advances out against your card at ATMs and interest begins accruing immediately.
• Payday loan: Online and in-person payday lenders exist to give people fast funds, with amounts typically up to their normal paycheck amount. Lenders offer shorter terms — typically just a few weeks — for borrowers to pay back their amounts. Plus, you could pay around $15 in interest for every $100 you borrow.
• Cash advance app: These apps are like payday loans, offering small infusions of cash with short terms, typically less than $1,000 for a couple months. While they advertise no-interest lending, cash advance apps may have other fees for account maintenance, instant funding, bank account connections or membership.

Do cash advances hurt your credit?

In short, yes, a cash advance can hurt your credit, but how much depends on the type of cash advance and how you handle repayment.

Credit card cash advances

A cash advance won’t show up as a line item on your credit report. That’s not how your score drops. Instead, it increases your credit card balance, which increases your credit utilization ratio (a percentage of how much of your available credit you’re using). If you don’t pay off the balance by the next statement date, then your issuer reports your balance and utilization to the credit bureaus.

For example, if you have a $5,000 balance, and you take out an advance of $2,500, your credit utilization ratio is 50% — much higher than the recommended 30% or less. Your credit score will likely drop in response. It won’t plummet, but credit utilization makes up 30% of your FICO score.

Payday loans

Payday lenders, whether they’re a brick-and-mortar store or an online lender, typically conduct credit checks when reviewing your loan application. While one or two credit checks won’t drop your score by more than a dozen points, applications for lending show up on your credit report and stay there for up to two years.

If you apply for credit in the future, lenders will see how many times other creditors reviewed your credit reports for lending applications. Too many of these hard credit checks may signal you’re desperate for cash and a risky borrower.

Cash advance apps

While handy and easy to access, cash advance apps work similarly to payday loans. Many advertise no credit checks, which is helpful if you have poor or no credit. In plenty of cases, they also don’t charge interest and lend up to $1,000, depending on your eligibility.

Be wary of the many hidden fees. Some cash advance apps make money by charging  account maintenance, instant funding, bank account connections or membership. They also report to the credit bureaus your account activity, including your balance and payment history. Missing a payment will negatively affect your credit.

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How lenders view cash advances

Frequent cash advances can hurt your ability to get a good interest rate or even a loan with some lenders. Mortgage and auto loan underwriters will often review your past two to six years of your credit history. They often see repeated cash advances as a sign of cash flow problems or financial distress.

If you’ve taken a cash advance in the past six months, pay down your balances now and stop taking any new advances before you apply for a mortgage or auto loan. If you’re applying for any major loan, wait three to six months after you repay your last cash advance. This will improve your chances of getting an approval.

Also, be prepared to explain any cash advances if an underwriter does bring it up. You can explain it as a one-time emergency and reassure them that it’s not a recurring issue. You might even have to include a letter of explanation.

Our expert advice:

Document your cash advance repayments and have a written explanation ready for underwriters, if needed.

Best ways to recover from cash advance credit damage

Alright, let’s say you’re in a terrible spot. You’ve taken a ton of cash advances. Now you want a loan, or you’re thinking of getting a mortgage.

First, don’t wait for your score to drop, or keep dropping. You can’t change the past, but you can move forward now.

Here are the proactive steps you can take to improve your credit score: 

• Pay off all of your cash advances as quickly as possible. 
• Set up automatic payments on all your credit card balances, so you’ll avoid fees and accidental missed payments. 
• Keep an eye on your credit report for changes or errors using free tools like Experian’s credit report access.
• Immediately dispute any errors, unauthorized charges or incorrect balances with the credit bureaus. You can get a step-by-step guide for writing a dispute letter from the Consumer Financial Protection Bureau.
• You can seek credit counseling if you’re struggling with debt. You can talk to the National Foundation for Credit Counseling for free consultations.

Our expert advice:

Document every communication with your lender and the credit bureau. A paper trail can make or break your case if the error is not resolved quickly.