Taking out too many cash advances can hurt your customer profile with your credit card company.
If you’ve ever needed money in a hurry, you may have used your credit card to take out a cash advance. But you also may have heard that taking out too many cash advances on your credit card could flag you as a risky borrower.
While a cash advance may present itself as a nice perk of your credit card, here are some risks you should consider before punching in your code at the ATM.
Cash advances vs. standard credit card purchases
When you spend money on a credit card, the amount you spend is added to your open balance on the card. After a 30-day grace period—which is standard on most traditional cards—you will start to accrue interest on that purchase.
With regular credit card transactions, money doesn’t change hands; you swipe your card, and money exchanges electronically. But with a credit card cash advance, you can use your card to take out physical cash from an ATM—and the amount you withdraw is added to your open balance.
There are a couple other key differences between credit card cash advances and regular credit card transactions. For one, most cards charge a cash advance fee, usually a few dollars or a small percentage of the amount you withdraw, whichever is higher. That fee is also added to your open balance—similar to when you are charged a cash withdrawal fee at an ATM.
Next, your card has a separate cash advance limit that’s smaller than your total credit limit on the card. This means you are limited to how much money you can withdraw through a cash advance. Cash advances also come with a different, higher annual percentage rate (APR) from your normal transactions, making the relative cost of an advance even higher.
Last, credit card cash advances do not usually come with any kind of grace period. The moment the transaction hits your open balance, it starts accruing interest.
Will credit card cash advances get you flagged?
You will not be penalized for taking out a cash advance any more than you would be for simply spending more money on your card. Credit card cash advances are simply recorded on your credit report as a change in your credit card balance. However, credit card cash advances can get you flagged by your credit card company. If they see that you are taking out a lot of cash advances, their credit model could flag you as a riskier borrower. This will limit the kinds of perks and benefits you receive on that card—and it could lead to your total cost of credit increasing.
Monica Eaton-Cardone, owner & COO of Chargebacks911, laid out how too many cash advances taken out on your card can affect your standing as a customer, especially if you can’t pay back the amount you borrow:
“Simply, if you can’t afford the amount withdrawn from your account and aren’t able to pay it off within a couple of months, you’ll be classified as a riskier borrower,” she said. “Any form of delinquency will increase the perception of risk, as lenders don’t trust individuals who can’t fulfill their current financial responsibilities.”
The relationship between cash advances and credit scores
While credit card cash advances don’t have a direct effect on your credit score, irresponsible credit card use is a big reason why people end up with bad credit, relying on no credit check loans and payday loans to get by when they have an unexpected bill or expense.
“If you decide to get an advance, make sure you will have enough to cover the interest and cash advance fee within a reasonable timeframe,” said Eaton-Cardone. “Also, if you receive something in the mail that says ‘credit card checks,’ understand these are not the same as standard banking checks; these usually are treated as cash advances.”
There are two factors that make up almost two-thirds of your total credit score: Your payment history, which comprises 35% of your score, and your total amounts owed, which makes up an additional 30%. And a big part of your total amounts owed is your credit utilization ratio, which measures how much of your total credit limits you are using. A person whose outstanding credit card balance is 80% of their total credit limit is not using credit as responsibly as someone who never spends more than 20% of their limit.
To put it simply: Using credit card cash advances regularly means borrowing more money at higher rates than normal, both increasing your total debt load and your cost of borrowing. That is a recipe for tanking your credit utilization ratio, which will, in turn, tank your credit score.
And if those additional loads lead to you paying your bills late, the effect on your score will be even worse. Even one late payment can really hurt your credit score. Cash advances can be useful if you are truly in a “cash-only” jam, but, but before you borrow the money, be wary of the true and total cost.
Monica Eaton-Cardone is the owner, cofounder, and chief operating officer of Chargebacks911, a global company dedicated to preventing chargeback fraud; eliminating cyber-shoplifting; and safeguarding the e-commerce experience for retailers, banks, buyers, and sellers. Chargebacks911 manages billions of online transactions annually and has helped its clients recover more than US$1 billion in disputed revenue. Monica is also the author of “Chargebacks for Dummies.” Follow her on Twitter @chargebacks911.
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