How Will a Cash Advance Loan Affect Your Credit?
One of the many annoying things about cash advances is that they can’t help your score, but they can definitely hurt it.
When you have zero money in savings and a surprise car repair or emergency room bill is suddenly plopped in your lap, you’re probably thinking about only one thing: How you can get the money you need fast. The last thing on your mind is how that cash advance loan’s going to affect your credit score—especially if your score is already pretty lousy.
But that sort of short-term mindset is going to come around and bite you later on. Aside from finding a loan that has reasonable interest rates and, even more importantly, payments you can afford to make, you should be taking into consideration how that loan affect your credit score.
There are plenty of reasons why should think twice before taking out a short-term cash advance, but the effect (or lack thereof) that that loan will have on your credit score shouldn’t be forgotten.
What is a cash advance loan?
If you’re familiar with payday loans, then you’re familiar with cash advance loans, as those are simply two names for the same thing. It’s a short-term high-interest loan designed as an advance on the borrower’s next paycheck, usually with a due date set for their following payday.
Cash advance loans have an average repayment term of only two weeks and an average interest charge of $15 per $100. Unlike installment loans, cash advances charge interest as a flat fee, with the entire amount (principal and interest) paid back in a single lump sum.
A 15 percent interest charge might seem reasonable when compared to standard personal loans, but the cost for cash advance loans is actually far higher. When measured as an annual percentage rate (APR), the interest for a two-week cash advance is almost 400 percent!
Cash advance loans are a type of bad credit loan, which means that they’re aimed at people whose poor credit scores lock them out from borrowing with traditional lenders. While the cost for most bad credit loans is higher than the rates for traditional personal loans, the cost for cash advance loans is especially high.
How do personal loans affect your credit score?
Your FICO credit score is a number between 300 and 850 that’s based on information in your credit reports. You actually have three different credit reports, one each from the three major credit bureaus—Experian, TransUnion, and Equifax. Since information can vary between your reports, and your credit score can vary depending on which report was used to create it.
FICO scores are built on using five different categories of information: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix (10 percent), and new credit inquiries (10 percent).
Your payment history relies on lenders, landlords, and utility companies reporting to the credit bureaus. When you make on-time payments, those help your score; when you pay your bills late—or don’t pay them at all—that hurts your score.
Traditional lenders like banks, credit unions, and credit card companies all report their customers’ payment information to the credit bureaus. With bad credit lenders, however, things aren’t so simple.
Are your cash advance payments being reported?
Most bad credit lenders offer no credit check loans, which means that they do not check a person’s credit score when evaluating their loan application. For people with bad credit, this can be nice, because hard credit checks will temporarily lower their score; that’s the last thing they need!
But there’s a flipside to this: Those same lenders often don’t report payment information either. This means that the payments you make on your loan won’t get recorded on your credit report and, thus, won’t affect your score.
This is especially common with short-term bad credit loans, including cash advances. If you take out a cash advance loan and then pay it back on time, there isn’t going to be any effect on your credit score.
Here’s the annoying part: Paying off your cash advance loan won’t help your score, but failing to pay the loan back will hurt it. So how does that work?
Debt collectors report to the credit bureaus.
Whereas most no credit check lenders don’t report to the credit bureaus, the vast majority of debt collection agencies definitely do report to them. And if you fail to pay back your cash advance loan, the lender will very likely sell that outstanding debt to a debt collector.
Once the debt collector has purchased the debt, it will be reported to the credit bureau as a “collection account” which goes into your payment history as a record that you failed to pay back a debt.
It takes a long time to build up a solid positive payment history, but all it takes is one late payment to wipe out much of that hard work. And the same is true for collection accounts. Even if your score is already in the tank, that account is going to make sure it stays there—or might drop it even further.
If the debt collector ends up taking you to court over the unpaid debt, the decision could result in your wages being garnished—and that garnishment will also be reported on your credit report. Cash advance loans may not be able to help your credit score, but there are several ways that they can hurt it.
To learn more about credit scores, check out these related posts and articles from OppLoans:
- A Brief History of Credit Scores
- What is VantageScore?
- No Credit Card? Here Are 6 Ways You Can Still Fix Your Credit Score
- Credit Utilization Ratio: What It Is, Why It’s Important, and How to Master It