How Are Cash Advances Different from Regular Credit Card Transactions?
Cash advances let you use your credit card to take out paper money—which can be handy—but the extra costs for doing so are going to add up fast.
Credit cards can be a great tool to help people earn rewards, manage their monthly cash flow, and maintain their credit score. However, they can also be a really great way for people to spend far beyond their means, rack up excess debt, and send their credit score plummeting. It all depends on how you use them!
Credit cards can also be used to take out paper money using a cash advance. And while the differences between a cash advance and a regular credit card transaction might seem pretty straightforward, it’s actually a bit more complicated than that—and a great deal more costly.
Here’s how credit cards work.
Credit cards work much like a traditional line of credit (LOC). Instead of taking out a set sum of money, as you would with a personal loan, a LOC gives you a set amount of money that you can borrow up to and then lets you withdraw funds at your own discretion. You are only charged interest on the funds that you actually withdraw.
With credit cards, the terminology works like this: The total amount you can borrow is referred to as your “credit limit” and the amount you’ve withdrawn is referred to as your “outstanding balance.” Every time you use the card to make a purchase, funds are added to that outstanding balance up to the total credit limit.
Credit cards have a “revolving” balance, which is an important distinction from some other LOC products. A revolving balance means that the amount you can borrow against your credit limit replenishes every time you make a payment.
For example: If you borrow $1,000 on a credit card with a $3,000 limit, you then have $2,000 left that you could borrow in the future. But if you pay that $1,000 off, you would then have the full $3,000 left available to you for future use.
Cash advances have a separate credit limit.
When you make a purchase on your credit card, not physical money changes hands. The merchant receives the funds for your transaction electronically, and that same amount is then added onto your card’s outstanding balance.
But if you absolutely need paper money, you can use your card to get cash. All you need to do is go to an ATM and use your card to make a withdrawal. While some credit cards might not have cash advance features, they are very common.
However, if you’re looking to borrow a lot of cash using a cash advance, you might run into trouble. Cards that have cash advance features have a separate, lower credit limit for how much you can withdraw in cash.
While these credit limits vary from card to card (and user to user), they’re often set as a percentage of your total credit limit. The higher your total limit, the more cash you can withdraw. As credit limits are oftentimes related to your credit score, bad credit borrowers might find themselves at a disadvantage.
Cash advances are way more expensive.
Then again, just because you can withdraw all that cash doesn’t mean you should. For one thing, you should refrain from spending beyond your limits on a credit card, regardless of whether you’re using cash or credit. Plus, the lower you keep your balances, the more it will help your score.
But if you find yourself facing an unforeseen bill or emergency expense and absolutely need to put the charge on your card, you should opt for credit instead of cash. Why? Because credit card cash advances are much more expensive than regular transactions.
To begin with, there are the interest rates: Cash advances almost always come with a separate, higher rate than regular transactions. Check your cardholder agreement to see what the cash advance APR is for your particular card.
Second, most credit cards come with a one-month interest-free grace period for normal transactions. If you pay off the transaction within that period, you don’t have to pay any interest at all! With cash advances, on the other hand, there is no such grace period; interest will start accruing the second that transaction is added to your balance.
Lastly, there are the fees. Not only do most cards charge you a cash advance fee purely for making the transaction—oftentimes, it’s two to three percent of the amount withdrawn—but you’ll very likely have to pay an ATM fee on top of that other charge.
If you find yourself in the middle of a true cash-only emergency, a credit card cash advance can be useful. But otherwise, they’re much too expensive to be worth it.
They’re still better than cash advance loans.
While we don’t recommend credit card cash advances in any situation that doesn’t absolutely demand one, we also can’t deny that they are a far better option than short-term cash advance loans like payday loans or title loans.
The high-interest rates for credit card cash advances aren’t great, but they are far preferable to the astronomical APRs for payday cash advance loans, which average almost 400 percent. (Title loans, which put you at risk of losing your car or truck, have an average APR of 300 percent.)
Due to their high rates, their short terms, and their lump-sum repayment structure, no credit check loans such as these can be difficult for consumers to repay on time, which can lead them down the slippery slope towards a debt trap.
If you are unable to use a credit card cash advance to cover a surprise bill and you need to take out a bad credit loan, you should look into possibly taking out an installment loan that will provide you with more manageable payments.
But the best method to protect your money in situations like this is to maintain a well-stocked emergency fund. That way, you won’t need to take out any loans or cash advances at all! To learn more about you can improve your long-term financial situation, check out these related posts and articles from OppLoans:
Checking Your Credit vs. Checking Your Ability to Repay
If you have bad credit, then you have to be on the lookout for predatory lenders, so start looking for lenders who check your ability to repay the money you’re borrowing.
For people with good credit, any loan they take out is going to come with a credit check. They’re not too worried about it because, well, they have good credit! Check away, lenders and landlords! No skeletons in these here closets.
But for people with bad credit, the situation is totally different. The requirement that a lender checks their credit means they might as well not apply. Besides, a hard credit check will actually lower your score slightly, and a bad credit score needs all the help it can get.
That doesn’t have to happen, though! There are bad credit loans out there that can provide helpful bridge financing for someone who’s in a bind. If you have bad credit, it’s all about finding the right bad credit loan. And a good place to start is by finding a lender who, even though they aren’t checking your credit, still checks your ability to repay.
How do bad credit loans work?
Bad credit loans are a little different from regular personal loans. Since they’re meant for folks with poor credit scores, they see much higher default rates than loans that are aimed at people with prime scores. As such, bad credit loans come with much higher interest rates to counteract those higher rates of default.
Many bad credit loans, like payday loanscash advances, and title loans are extremely short-term loans, with average repayment periods of only two weeks. They’re small-dollar loans, too; while rates will vary from lender to lender and from state to state, short-term payday loans aren’t usually offered for more than a few hundred dollars.
These short-term loans are paid off in a single lump sum, and they charge interest as a flat fee at an average rate of $15 per $100 borrowed. (In terms of APR, that adds up to 391 percent on a two-week loan!) If you borrowed a $400 cash advance at a 15 percent interest rate, you’d pay it back in a single payment of $460 on the loan’s due date.
There are also bad credit installment loans, which are structured like regular personal loans, just with higher interest rates. The interest for bad credit installment loans is accrued over time, and they come with an amortizing payment structure, which means that every payment you make goes towards both the principal amount owed and the interest.
How do credit checks work?
When a traditional lender is assessing a loan application, they want to see whether or not the borrower in question is likely to repay their loan. One of the best ways that they have to determine this is by checking the person’s credit.
This doesn’t just mean checking their credit score, either. A “hard” check on a person’s credit score will return a copy of their credit report as well.
Credit reports are documents maintained by the major credit reporting agencies that track your history as a borrower. The information on those reports is used to create people’s credit scores, and getting a copy of someone’s credit report allows a lender to get a full view of their credit history.
Recent credit inquiries make up 10 percent of your overall score. Anytime a hard credit check is made on your history, that check is, itself, recorded on your credit report. Applications for new credit usually temporarily ding a person’s score by 5 points or so, and many checks in a short-period can lower it even more.
“Soft” credit checks, on the other hand, return far less information than a hard credit check, but they also don’t get reported on a person’s credit report and they don’t affect their score.
Finding a lender who checks your ability to repay.
All of the loans mentioned in the first section of this post don’t require a hard credit check as a part of their application process. But some of these lenders don’t do anything else to verify whether a borrower can afford the loan they’re applying for. That’s where things get risky.
With short-term payday cash advances, it can actually be very difficult for many customers to pay these loans back on time. Those lump sum repayments can blow a large hole in many people’s monthly budgets, leading them to roll over their loan or take out a new loan in order to make ends meet.
This is how people end up trapped in a cycle of debt, continually incurring new interest fees and charges in order to, essentially, borrow the same amount of money over and over again. They throw money at their loan every couple of weeks without ever getting closer to getting out of debt.
Some lenders will issue a loan to almost anyone who applies, regardless of whether they can afford that loan or not. Other lenders will run a soft credit check, verify a borrower’s income, or perform other underwriting measures to ensure that borrowers can reasonably pay back the money they’re borrowing.
If you have bad credit and need a loan to cover emergency expenses, find a lender who checks your ability to repay. It’ll help you steer clear of a dangerous payday debt trap and stay on the road to getting debt-free.
Want to improve your score and stop worrying about credit checks? Then check out these related posts and articles from OppLoans:
Regardless of your credit score, finding the right installment loan for you means knowing the right questions to ask. Well, you’re in luck! Here are five questions you should be asking yourself before taking out an installment loan.
1. What’s the interest rate?
This is pretty basic stuff, but it never hurts to repeat: When shopping for an installment loan, you want to find the best interest rate you can. Don’t just go with the first loan you see. Do your research, and find the most affordable loan you can.
A loan’s interest rate measures how much that loan is going to cost. Whereas short-term no credit check loans like cash advances and title loans charge interest as a flat fee (say, $15 per $100 borrowed), installment loans charge interest as an ongoing rate. The longer your loan is outstanding, the more interest accrues.
The best measure to use is the loan’s annual percentage rate (APR), which calculates how much the loan will cost over the course of a full year, including both the interest and any additional fees.
One thing to keep in mind, however, is that you will likely be paying less money in interest than the stated rate would imply. This is because interest gets charged as a percentage of your outstanding balance, which grows smaller every time you make a payment.
One of the great things about installment loans (as opposed to short-term cash advance loans), is that paying off the loan early will save you money. Like we mentioned above, the longer the loan is outstanding, the more interest accrues. Happily, the reverse is also true: the sooner you pay the loan off, the less interest you’ll pay.
There is an exception to this last rule, which we’ll cover in question number four.
2. How much are the individual payments?
While interest rate and APR will determine how much your installment loan costs, they don’t actually determine whether or not you can afford the loan. That’s going to depend on the size of your payments.
Before you agree to take out a given installment loan, you need to look at the proposed payments and measure them against your monthly budget. Do the math and ask yourself: Am I going to be able to afford these payments? If not, then this is not the loan for you.
Installment loans have an amortizing repayment structure. This means that every individual payment goes towards both the principal amount owed and the interest. The ratio of principal to interest for each payment changes over the life of the loan according to the loan’s amortization schedule.
There are several factors that determine the size of your loan payments. Beyond the amount that you’re borrowing and the interest rate, there’s the length of the loan’s repayment period and the frequency of the payments themselves.
Obviously, the more money you borrow, the larger your payments. The same goes for interest rate: the higher your rate, the larger your payments. And the more infrequent your payments, the larger those individual payments are going to be.
But the total repayment period can be a little trickier. The longer a loan is outstanding, the more payments are made, and the smaller each individual payment is going to be. Borrowing a certain amount of money with a two-year installment loan, for instance, will mean smaller payments than borrowing that same amount of money with a one-year loan.
However, a long repayment period also means paying more for the loan overall. As we mentioned above, a loan that’s outstanding for a longer period of time is going to accrue more money in interest. You will have to balance affordability with the overall cost.
3. Do these due dates work for me?
One of the keys to balancing a monthly budget is to make sure that you always have the proper funds in your bank account to cover your different bills. Minimizing those bills as much as possible an important step, but so is making sure that those bills are evenly spread out.
So when you’re applying for an installment loan, make sure that you get a sense of when the proposed due date for each payment is. If that date is smack dab in the middle of a period when all your other bills are due, ask if it can be changed. Your lender will very likely be able to work with you on that.
What if you’re already making loan payments and you realize that your due date is causing you a hardship? If that happens, you should still reach out to your lender to see what can be done. Ideally, you would have enough money in your accounts to not feel the pinch in those couple days before payday, but many people don’t. And that’s okay.
4. Are there pre-payment penalties?
We mentioned earlier that paying off an installment loan early will save you money. But if there are prepayment penalties, it might not!
Prepayment penalties are fees levied by a lender on a customer who pays off their loan early. Since lenders lose out on extra accrued interest when a loan’s principal is paid off ahead of schedule, these penalties help their bottom line.
That’s understandable, but prepayment penalties also disincentivize responsible financial behavior! If you have the money to pay off a loan early and save yourself extra money, you should do that! Take it from us! We write about how people can save moneyallthetime.
Prepayment penalties aren’t a deal-breaker by any means, but it’s certainly a “con,” not a “pro.” And if a lender is charging them, you’ll want to read your loan agreement extra carefully to make sure there aren’t any other surprises in store.
5. How do other customers feel?
When you buy a new appliance off Amazon, you read the customer reviews first, right? Well, why wouldn’t you do the same with an online loan? Or a loan from a brick-and-mortar bank, for that matter?
Before you put your signature on any loan agreement, you should do some digging on the lender to see what other customers are saying about them. You can do this by visiting sites like LendingTree, visiting their BBB page, checking out the company’s social media pages (including their mentions) and by scanning their Google reviews.
Don’t just trust what any lender tells you in their advertisements. Do your research and find out how they’re performing out there in the real world. That way, you can borrow with confidence, knowing that you’ve found the right installment loan for you.
To learn more about borrowing smarter, check out these related posts and articles from OppLoans:
Don’t worry, it is very rare that paying off a personal loan will cause your score to drop, but it does happen every so often.
Wait a minute, did you read that title right? Paying off a personal loan might lower your credit score?
Unfortunately, it is indeed possible. Thankfully, it’s far from the norm. We’ll reiterate this point later on, but paying off your debts is almostalways going to help your credit score.
So if you only take one thing away from this article, it’s that you should pay your bills on time and in full.
OK, now let’s actually address the question.
But first, let’s go over credit scores.
If you’re a regular reader of the Financial Sense Blog, you probably already know the factors that make up your credit score inside and out. But this could be someone’s first financial article ever! So we’ll just do a quick run-through.
The three major credit bureaus, Experian, TransUnion, and Equifax collect financial information which is used to generate your FICO credit score. FICO scores are a number between 300 and 850. The higher the score, the better loans you’ll be able to access and at better rates.
There are five factors that go into your credit score. In descending order of importance, they are:
amounts owed (also known as credit utilization)
the length of your credit history
Want a more in-depth break down of each of those factors and the activities you should pursue to positively affect them? Well, then we’ve got an article for you!
Pretty much never.
As we made clear in the opening paragraph, paying off your loans is almost always going to have a positive effect on your credit score.
“Paying off your credit card or loan will never negatively impact your credit score,” advised Mike Pearson, founder of personal finance website Credit Takeoff. “In fact, making on-time payments on your accounts is actually the single most important factor when it comes to calculating your credit score. So where does this misconception come from?
“I believe it’s when you pay off a credit card completely … and then close the account. When you close a credit card, it can end up hurting your credit score because you have just lowered the amount of available credit you have, which will increase your credit utilization, which is the second most important credit score factor.
“Generally, you want to keep a credit utilization under 30 percent. For example, say you have two credit cards, both with a $5,000 limit, and your credit card balance is $2,500. Since your balance is only 25 percent of your total available credit between your two cards, you are in good shape. However, look at what happens when you close one of those credit cards.
Suddenly, your total available credit is only $5,000 in total. And if you have a $2,500 balance, your credit utilization has just doubled to 50 percent. In this instance, your credit score will definitely drop as a result of having a high credit utilization.
“In short: paying off your credit card will never hurt your score, only when you close the card for good.”
So that’s the story with credit cards. But perhaps there are some instances where paying off an installment loan will have a negative impact on your credit score?
But not quite never.
There are actually a few instances where paying off a loan may have a somewhat negative impact on your score.
“In general, paying down a balance will help your credit rating,” explained Todd Christensen, education manager for Money Fit by DRS, Inc. (@MoneyFitbyDRS). “Paying it off is even better. That said, there is some gray area where some balance payoffs may not help much if at all. This is particularly true for old collection accounts that are about to fall off your credit report or already have.
“If the debts are no longer reporting to your credit (in theory, seven years from the last time your account changed status, such as from on time to late or from late to paid as agreed, though in practice seven-and-a-half years is what you can expect), they have no impact on your credit rating.
“By paying them down or off, you are possibly changing the reporting status form late or default to paid, which could restart the seven-year reporting period. But such accounts, even though paid, would still report for those seven years as a collection or charged off account, albeit with a $0 balance.
“Paying a balance down to $0 is one of the best things you can usually do to build or rebuild your credit. After keeping your account status in the ‘paid as agreed’ range, lowering your account balances should be your next priority.
“It is not an easy choice. Most people want to pay off or down their debts. In cases of very old debts, doing so can complicate, if not damage, your credit rating. It never hurts to ask the collection agency or creditor holding your old debt to accept the payment but not to restart the credit reporting period. Just getting it in writing.”
Dave Sullivan, vice-president of marketing for the People Driven Credit Union (@peopledrivencu) reiterated that paying off a loan can occasionally lower your credit score and urged the always important advice of looking at each instance on a case-by-case basis:
“Paying an installment loan off can also reduce a credit score if there are no other installment or mortgage accounts on the credit history. As with all credit advice, it depends on the individual’s credit profile.”
There’s also the issue of student loans. While paying off your student loans is, of course, something to be celebrated, it’s not unlikely that doing so will cause a hit to your credit score. We’ve actually covered the phenomenon previously.
So to sum up, you should pay off your debts. Just know there is a chance your credit score could go down and plan accordingly if necessary. To learn more about how you can improve your credit score, check out these other posts and articles from OppLoans:
Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit by DRS, Inc. (@MoneyFitbyDRS), a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories and ideas shared by the tens of thousands of individuals and couples in attendance.
Mike Pearson is the founder of Credit Takeoff, a research-driven personal finance site for people looking to improve their credit. A proud member of the 800 Credit Club, Mike writes about practical steps that everyday consumers can take to increase their credit scores. His advice on credit repair and credit scores has appeared in QuickBooks, Go Banking Rates, and MortgageLoan.com.
Dave Sullivan is the VP of Marketing for People Driven Credit Union. He started in the mortgage industry as a loan officer in 1991. Less than one year later started selling credit reports to Mortgage Companies, Banks and Credit Unions. On September 19, 1997, he started AIR Credit Midwest out of his car. Over the next two years, Air Credit Midwest grew to a multi-million dollar company. In 2000, He sold Air Credit Midwest to one of the largest credit reporting bureaus. In 2011, Sullivan started a YouTube channel providing free advice on improving your credit. He is the author of the book Transform Your Credit.
How to Raise Your Credit Score by 100 Points
The two most important parts of your score are your payment history and your amounts owed, so those are great places to start.
For folks with bad credit, improving that score is step number one on their journey to financial fitness. Otherwise, when times get tough and they need to borrow money, they’re going to be stuck taking out predatory no credit check loans and short-term bad credit loans like payday loans, cash advances, and title loans to make ends meet (which probably won’t end well).
Raising your score means being able to secure lower interest rates and better financial products. Even if your score is just okay, taking that score from “good” to “great” could be the key to unlocking your financial future. If you want to raise your credit score by 100 points or more, here’s what you should do.
Check your credit report.
Your credit score is based on the information contained in your credit report. These are documents that catalog your history as a borrower, and they are compiled by the three major credit bureaus: Experian, TransUnion, and Equifax.
As such, the best place to start when fixing your credit score is with your credit report. Not only will it give you an idea of what areas you need to fix, but it might even contain mistakes that are artificially lowering your score.
And since you can request one free report from each credit bureau, that means you can get as many as three free credit reports annually!
“The credit bureaus process untold trillions in payments and accounts, and they make mistakes all the time,” said Brian Davis, co-founder of SparkRental.com (@SparkRental). “It’s your responsibility and your responsibility alone to make sure your credit report is accurate, and that you don’t have errors hurting your credit score.”
There are five different categories of information from your credit reports that make up your credit score. The most important category is your payment history, which makes up 35 percent of your score. When fixing your credit score, paying your bills on time is going to be key.
“Pay all accounts on time every single month,” said Davis. “Even if you can only make the minimum payment, make sure it’s on time because late payments mar your credit score.”
“Credit cards must be paid before anything else, like utility bills, (although not before the mortgage),” advised Abramson. “Wait for 30 days and your delinquency may be reported by your credit card issuers.”
They aren’t kidding; even one late payment that’s reported to the credit bureaus could dramatically lower your score. If you know you’re going to be late, call the company in question to see what can be done.
You can also take a look at your bill schedules to see if a certain cluster of due dates is causing financial strain. If you call your lenders or utility companies, the odds are pretty good that you can have those due dates changed to ease the pressure.
But what if you don’t have any loans or credit cards? How do you start building your payment history then? Don’t worry. There’s a solution.
“If you’re new to credit or have weak or poor credit, become an authorized user on someone’s credit card,” advised Debt AssassinRJ Mansfield (@DebtAssassin1). “As an AU you are never responsible for payments, but it will be reported on your credit report and help your score.”
And if you can’t become an authorized user, try taking out a secured credit card to start building a better payment history. Above all else, a good credit score begins with paying your bills on time. There’s no way around it!
Keep your credit utilization low.
The second most important part of your credit score is your amounts owed, which makes up 30 percent of your total score. If you have too much outstanding debt on loans and credit cards, your score is going to drop. Likewise, reducing that debt load will help improve it!
However, there one specific aspect of your amounts owed that you should keep an eye on, as it can have a huge effect on your score: And that’s your credit utilization ratio, which affects any debt like credit cards where you can borrow up to a certain credit limit.
“One of the metrics that determine your credit score is the ratio of credit used to credit available. Keeping all your balances below 30 percent of the limit keeps your score higher,” said Davis.
This goes beyond paying off your credit card balances every month. To make sure you don’t get caught flat-footed by the start of the billing cycle, you should try and keep your balances below thirty percent at all times.
“Try to pay your credit card bill BEFORE your statement is cut rather than by the due date,” said Abramson. “Most credit card issuers report your balances to credit bureaus around the time your statement closes.”
And in terms of maintaining lower balances, Abramson went even further. “Try to keep your utilization ratio (the ratio of your debt to your line of credit) below 10 percent for each of your credit cards,” he said. “That’s an aggressive goal, but your utilization ratio is the second most important component of the FICO score.”
Let’s be clear: 30 percent isn’t some kind of magic threshold; dropping underneath it won’t magically “fix” your score. It’s a good place to start, but you should be getting your balances as low as possible—on the way to paying them off entirely.
In order to bust some myths surrounding the 30 percent line, Mansfield conducted a personal experiment using his own credit cards. Here’s what he found:
“Popular advice from ‘so-called’ credit experts is that it’s fine to carry up to thirty percent of your available credit lines. It is not. I did it. I carried twenty-nine percent to test the theory and my score dropped from 811 to 730, a drop of 81 points. Only carry a balance if you can’t pay it in full to maximize your score.”
Keep those old cards open.
Paying down your debts is good—and be good we mean “pretty necessary to maintaining a good credit score”—but there are other actions you can take to make sure that your credit utilization remains as low as possible.
Remember, there are two sides to your credit utilization ratio: The balances owed, and the total available credit. So while you pay down your balances, why not make sure that your total available credit remains as high as possible?
“Avoid closing down a credit card even if you don’t need it anymore (unless it has an annual fee).” said Abramson. “When you close a credit card, your available line of credit shrinks, which can negatively impact your utilization ratio.”
And that’s not the only reason you should keep those old cards open. “Credit bureaus look at the average age of your accounts,” said Davis. “The older, the better.”
This is the hardest part of building your credit score. But if you’re really serious about the project, it’s something you can’t avoid.
“Time is the best credit-builder,” said Abramson. “If you handle your credit responsibly and avoid any derogatory remarks on your credit file, you will easily increase your score by a large margin within a year.”
These changes aren’t going to happen overnight. In order to fix your credit score—whether you want to raise it by 50 points, 100 points, or 150—you’re going to need to be patient. Just remember: The reward waiting for you on the other end will be worth it!
Here’s a story from someone who did it.
Before you set out on your own financial journey to improve your credit score, we figured you might like to hear a real-life story from someone who pulled it off. In his own words, here’s how Brandon Ballweg, founder and editor of the photography and tech website ComposeClick (@ComposeClick), managed to increase his credit score over 100 points over the past two years:
“I verified any collections that were showing on my credit report. I had several. One was reporting incorrectly, which was removed when brought to the creditor’s attention. The others I paid off, a couple of which I was able to get a pay for deletion agreement. I just did this over the phone with the collection agencies—there’s no reason to send them letters or try to get anything in writing.
“I started with a secured card and opened up a few regular credit cards and have paid them all off when the statement comes. I keep at least a small balance for most of my cards before the statement to show utilization. I keep my overall utilization under 20 percent, usually lower.
“I still have a ways to go because there are some missed payments showing on my credit report from a student loan provider. I hope to get these removed by communicating with the provider and pointing out the fact that I haven’t missed a payment in over a year and a half.
“That’s it. I don’t think anyone should be using expensive credit repair services that only do things that you would be able to do more effectively yourself. It’s all about getting as many negative marks removed from your credit reports and showing consistent responsible credit use.”
To learn more about how you can improve your credit score and your long-term financial outlook, check out these other posts and articles from OppLoans:
Uri Abramson is the co-founder of the growing personal finance blog OverdraftApps.com (@overdraftapps), which specializes in transparent and honest reviews of financial products for low-medium credit score population and debt resolution advice.
Brandon Ballweg is a photographer and entrepreneur. He is the founder of ComposeClick (@ComposeClick), an educational site for photographers that provides information on the technical aspects of photography and how to succeed in the photography business.
G. Brian Davis is a landlord, personal finance writer, and co-founder of SparkRental.com (@SparkRental), which provides free video courses and rental investing tools for landlords. He spends most of the year overseas, splitting his time between Abu Dhabi, Europe, and his hometown of Baltimore.
Loans With No Credit Check Sound Great; Here Are the Risks
It’s all about finding the right loan for you … and also avoiding the many no credit check loans out there that could trap you in a predatory cycle of debt.
When you have bad credit and you need a loan, the last thing you want is some lender running a credit check on your application. You already know your score is lousy, and you don’t need a hard credit check dropping it even further.
That’s where no credit check loans come in. But while they might seem perfect for someone who needs money now and has bad credit, they come with significant risks. Before taking out a loan with no credit check, you need to know exactly what you’re getting yourself into and what potential pitfalls to avoid.
What are no credit check loans?
The most common types of no credit check loans are payday loans, which are also known as “cash advances.” These are small-dollar short-term loans that rarely run more than a couple of hundred dollars and that come with an average repayment period of two weeks.
Title loans are another type of short-term no credit check loan; they come with slightly higher principals and longer repayment periods. Unlike payday loans, title loans are secured, using the title to the borrower’s car or truck as collateral.
No credit check loans are oftentimes much easier to obtain than regular personal loans. Even though they don’t run a credit check, some lenders will verify a borrower’s income before lending to them, while others simply ask for as little as an ID and a valid bank account.
Why don’t these lenders check credit scores?
When you apply for a loan from a traditional lender like a bank, they will check your credit history as a part of the application. This involves running a “hard check” on your credit, which returns your credit score and a copy of your credit report.
Checking your credit history allows these companies to assess how you’ve fared when borrowing money in the past, and it also gives them a window into how much debt you currently owe. Both of these factors help them make their decision. If you have a poor credit score, the odds are very high that you’ll be rejected.
But with no credit check loans, the process is quite different. These are bad credit loans, which are most often used by people who already have low credit scores. This makes checking the borrower’s credit a little beside the point.
When a lender runs a hard credit check on a person’s credit history, that check is recorded on the borrower’s credit report and can temporarily lower their score—even if the application is denied. One of the main advantages to no credit check loans is that applying for one won’t impact the borrower’s credit score at all.
However, there are also many downsides …
They’re more expensive.
Since most no credit check loan borrowers have lower credit scores, the default rate (or the percentage of customers that fail to pay back their loan) is much higher than the default rates for regular loans.
As such, no credit check loans come with much higher interest rates than standard personal loans. And some of them, including payday loans and title loans, come with rates that are way, way higher! (This is true for both online loansand loans from a brick-and-mortar lender.)
But it can tricky to see just how much higher they really are. Standard personal loans come with interest rates below 36 percent—and oftentimes well below that for borrowers with prime credit scores. Meanwhile, the average rate for a payday loan is 15 percent, while the average rate for a title loan is 25 percent. Those numbers seem a little on the higher side, but generally fine.
Except here’s the catch: The interest rate for those personal loans is assessed on an annual basis, while those interest charges for payday loans are only assessed over periods of two weeks and one month, respectively.
Whenever you’re shopping for any kind of loan or credit card, make sure you check its annual percentage rate (APR) to get a similar comparison between products. The APR for a two-week payday loan with a 15 percent interest charge is almost 400 percent, while the APR for a one-month payday loan with a 25 percent interest charge is 300 percent!
As we said, the interest rates for some of these no credit check loans are way, way higher!
It won’t help your credit score.
The most important part of your credit score is your payment history, which makes up 35 percent of your total score. Every time you make a credit card payment, a loan payment, or even pay your rent (in some cases), that information gets recorded on your credit report. So much as one late payment can dramatically impact your score.
For folks with bad credit, building a positive payment history is one of the best things they can do to improve their score. But with short-term no credit check loans, most lenders don’t report payment information to the credit bureaus, meaning that on-time payments can’t help borrowers build their payment history and improve their overall score.
This is the flipside of no credit checks. These lenders don’t care if their customers have poor credit, but they don’t take steps to help customers improve their credit, either.
But this isn’t true for all bad credit lenders. Some companies, like OppLoans, do report payment information to the credit bureaus. Before you take out a loan, check and see whether it could help you build better credit!
You risk entering a cycle of debt.
Here’s how a cycle of debt works: A borrower has so much debt that they can’t afford to pay it off. All they can afford to do is make their minimum payments—which isn’t nearly enough, but still adds up to quite a bit of money every month.
Because they’re putting so much money into their debt, they can’t afford to save any money either. When an unexpected bill arises, all the person can do is …. take on more debt to cover it! This means they have to start putting even more money towards their monthly minimum payments. And so the cycle continues.
Here’s a slight variation on that: A person takes out a $300 payday loan to cover a car repair and has to pay back $345 two weeks later. When their due date arrives, they find that paying $345 all at once will leave them with no money to buy groceries.
This person then pays off their loan and immediately takes out a new payday loan, once again paying $45 in interest on a $300 loan. Two weeks later, the same thing happens. This time, they roll over their loan, paying off the $45 owed and receiving a two-week extension … in return for an additional $45 interest charge.
Two weeks after that, they still can’t afford to pay back their loan, and so the cycle continues.
A study from the Pew Charitable Trusts found that well over 80 percent of payday loan borrowers didn’t have the money in their monthly budgets to cover their loan payments. This is partly because payday loans (and other short-term no credit check loans) require borrowers to pay their loans off all at once.
If you’re looking for a no credit check loan, look into the benefits of an amortizing installment loan. These loans are designed to be repaid in a series of smaller, regularly scheduled payments—and their amortizing structure means that every payment goes towards both the interest and the principal amount owed. Each payment you make will bring you one step closer to zeroing out your debt.
Look into a “soft credit check” loan.
Folks with bad credit who need to borrow money to bridge an unexpected financial gap—and who can’t borrow it from friends or family—should look into a variation on no credit check loans called “soft credit check” loans.
A soft credit check returns less information than a hard credit check, but it still gives a lender some idea of a borrower’s history with credit. Along with other underwriting factors, like income verification, a soft credit check can help a lender determine whether or not a person can actually afford the loan they’re applying for.
And that’s really the key. When you have bad credit and you need a loan—especially in times of financial emergency—it’s all too easy to borrow a loan that you can’t really afford to pay back. That’s how people end up trapped in a cycle of debt, with their financial outlook looking dimmer by the day.
Credit-building. Manageable, amortized payments. Soft credit checks. Reasonable interest rates. Find a lender who can offer you all of these, and you’ll be well on your way to finding a no credit check loan that works for you.
Other than building an emergency fund, the best way to avoid no credit check loans is to … improve your credit score! To learn more about how you can fix your credit, check out these related posts and articles from OppLoans:
Some needs and wants are easy to distinguish. But other times, you’ll need to dive a little deeper to figure out what you can cut and what you really can’t live without.
When building your first budget, everyone is going to tell to separate your “needs” from your “wants.” No matter how you plan on using the money you save—whether it’s to pay down your debt or build a hefty nest egg—those extra funds are going to come from cutting down on superfluous costs, not the necessary ones.
But while a lot of your expenses will be easy to categories—rent is a definitely a “need,” while ice cream is undeniably a “want”—some spending areas won’t be so easy. That’s why we spoke to a number of experts to dig into the budgetary nitty gritty and find out just how exactly one goes about separating their “wants” from their “needs.”
This won’t be easy, but it will be helpful.
“Few people really understand how much money they actually spend buying items that they may want when first seeing them—but that aren’t true necessities,” said Timothy G. Wiedman, professor emeritus of Management and Human Resources at Doane University (@DoaneUniversity).
“For a great many folks, I’d bet that figure is quite a bit more than they’d ever imagined; and when a credit card is used to finance those unnecessary impulse purchases, the eventual damage is even greater!
William Acheson, CFO of GWG Holdings, Inc. in Minneapolis lamented how making good financial decisions, big and small, has gotten more difficult. “This is despite the proliferation of online and app-based spending, budgeting and investing tools,” he added.
According to Acheson, this increased difficulty was due to two main factors.
“The amount, intensity and sophistication of highly targeted advertising pushing us to spend more and more (to keep up with others).
“The vast, and often conflicting, amount of advice and opinions from the ‘experts’ who usually are trying to separate you and your money—see item number one above.”
“The result,” said Acheson, “can often be a disengagement from any form of advice or tools while you chalk it up all to noise and spend merrily ever deeper into debt.”
Getting a firm grip on what spending you should cut back on is a critical first step towards taking control of your financial future. It won’t be easy, but the benefits can’t be denied.
No more purchasing on impulse.
When you have a monthly budget, impulse purchases can throw everything out of whack. And if you’re buying something that can be categorized as a “splurge,” that pretty much tells you right there that it’s a “want,” not a “need.”
But cutting out impulse spending is easier said than done. So what can you do to keep those excess items out of your shopping cart? Here’s Wiedman with a very simple solution:
“I often used to fritter money away by making unnecessary impulse purchases, but I found a prevention strategy that has worked well for me.
“Before buying anything beyond my basic, everyday necessities (especially if an item is ‘pricey’), I put off the purchase decision long enough to ‘sleep on it.’ Then, after a day or two, I make a quick mental list of the pros and cons related to that particular purchase.
“Sometimes purchasing that item still seems reasonable, and I’ll shop around to find the best deal available. But, on the other hand, if buying that product hardly makes much sense at all, I’ll skip that purchase entirely.”
Does it need to be replaced?
Sometimes, a thing will break and you’ll definitely need to replace it. That’s a need. But with other items—ones that are still working fine, but are a little outdated or worse for wear—the line between “want” and “need” gets a little bit blurrier.
“In our modern society, we are quick to buy new because we’re constantly fed the information on the ‘latest and greatest.’” observed Shane Walker, executive VP and CMO at ProActive FinTech LLC.
But, even if an item breaks and needs to be replaced, there are larger principles at work that are likely hitting you right where it hurts: the bank account.
“As sad as it is, we also live with the reality that companies no longer design products to last,” said Walker. “Things are made to wear out or break down so we are forced to buy again. Unlike years ago, when products were made to last for years, we are faced monthly with needing to replace items.”
Even so, you need to think long and hard before spending to replace an expensive item that works fine but isn’t the newest, most fashionable item. Walker also noted that buying better-quality, longer-lasting items might cost you a little more in the short term but will save you money overall.
Follow the Rule of Eight.
There’s a flipside to buying nicer, more durable items over cheaper ones: Past a certain point, high-end products aren’t that much better than the middle-range ones. If you’re constantly buying the most expensive products out there, you’re adding a whole bunch of costly “want” on top of a basic “need.”
To combat this phenomenon and help people manage their money more effectively, Acheson has a simple system called the “Rule of Eight” that he believes leads to better and more informed spending choices across the board. Here’s how described it:
“The Rule of Eight has two components. First is the quality component. The Rule of Eight says that you get what you pay for any good with the quality of rating between one and eight on a 10-point scale.
“In other words, once the quality (you can substitute the word ‘luxury’ here) exceeds eight on the 10-point scale, the price rises very rapidly yet the usefulness of the item (economists call this the “utility” of the item) barely changes at all.
“An example from the household is that a GE Profile Range (seven or eight out of ten) has virtually the same utility as a luxury brand such as Wolf but at a fraction of the cost. This rule applies to virtually everything in the world from concert tickets to cars to coffee.
“The second component of the Rule of Eight is quantity. This is an easy one: 80 percent of your purchases should conform to the Rule of Eight. So, only on relatively rare occasions should you be buying nine or 10-points quality of anything.
“Save your 20 percent for those ‘luxury’ items that really matter and really mean something to you. For the rest of your purchases, ‘pretty good’ is more than good enough. Adopt the Rule of Eight into your lifestyle and you may surprise how much money you are wasting on needless ‘luxury.’”
Can you live without it?
Let’s cut to the chase. Something you need is something that you can’t live without. So why not just ask yourself, “Can I live without this?” That’s exactly what Jill, owner of the frugal family living blog Organizational Toast (@organizationaltoast), did—and it worked out great.
“When we became a one-income family we realized very early on that we had to openly and honestly look at what a want vs. a need was. This meant asking the simple question ’Can I live without this?’ Meaning will my life go on without this item,” said Jill.
“If the answer was ‘no’ we asked ourselves what were the most cost-effective options for that item? We did this for everything! From the smallest purchase at the grocery store to large purchases like a family vehicle. This questioning process made us really think about what we were buying and not only curbed our spending on wants but also cut down on impulse buying!”
If you want to make the decision process a little more scientific, Certified Financial Planner R.J. Weiss, founder of the personal finance site The Ways to Wealth (@thewaystowealth), has a solution that might appeal to you. “One way to separate wants from needs is to create a ‘To Buy’ list of items you’re looking to buy,” he said.
“Once you place something on the to buy list, make a note of how many times you would have used that item over the next 30 days. If it is something that will improve your daily quality of life, considering buying it. If you would have just used it once and it wasn’t critical, now you can take a pass.”
Consider cutting back in these four areas.
Some lifestyle areas are more likely to carry waste than others. Jeremy Rose, Director of the U.K. web hosting site CertaHosting suggested four areas of spending that were ripe for cutting back:
“Food, as one of the most frequent and largest monthly expenses, or to be exact, irrational buying of food (which are then not used, buying more types of the same food, accumulating food and the like) are in the first place when it comes to uncontrolled spending, “ he said. “Our actual biological needs differ from the ‘wants’ and indulgences we often do to feel better, not realizing it’s costing us money.”
Beyond food, Rose also suggested cutting back in the following two areas:
“Cable TV: Subscription to cable programs can burden the home budget, especially if we take into account the breadth of the currently available software packages on the market, their prices and their ability to combine.”
“Gym membership: Membership in a gym is one of the costs we are getting into because we think we need it in order to live a certain way. For those who use it occasionally and aren’t active members of the gym, this expenditure is unnecessary.”
Lastly, Rose advocated for staying in—which is usually very inexpensive—over going out, which is usually … not. “The decision to reduce monthly expenses and to cut on the things you really don’t need can be achieved by lowering or quitting altogether eating out,” he said.
However, he made to note that going out, shouldn’t be eliminated entirely “as social contacts play an important role in the private and business world.” He simply meant that habit should be “reduced to an acceptable level.”
This might take some time, so be patient.
With the exception of winning the lottery, there’s nothing you can do overnight to help your finances. Maintaining a budget and trimming your expenses is something that will take time—which means that it will also take patience.
Besides, the longer you track your expenses, the larger the sample size you’ll have to work with and the easier you’ll be able to pick out your own problem areas with money.
“Folks who are having trouble budgeting should track each and every expenditure they make for at least six weeks so that they can see where every bit of their money is going,” advised Wiedman. “At that point, they can begin to assess exactly where unnecessary spending is occurring and then formulate a plan to improve their spending habits.”
To underline his advice, Wiedman cited one of the world’s most famous (and accurate) pieces of financial wisdom: ‘Watch the pennies and the dollars will take care of themselves.’”
While choosing a more affordable installment loan is probably be the better option, your best option is to avoid needing any high-interest personal loans in the first place! Maintaining well-stocked emergency fund, managing your debt, and taking care of your credit score will turn that “need” into a “no need to worry!”
That’s why you need to plan ahead! To learn more about budgeting, saving, and proper money management, check out these other posts and articles from OppLoans:
William Acheson, Chief Financial Officer for GWG Holdings, Inc., has more than 25 years of experience in positions of importance for financial services firms around the globe. Prior to joining GWGH in 2014, Mr. Acheson served as Managing Director of Global Structured Finance and Investments at Merrill Lynch in London. Mr. Acheson earned B.S. degree in accounting from the College of St. Thomas in St. Paul, MN, and earned his CPA certificate in 1991.
Jill is the owner and voice of Organizational Toast (@organizationaltoast), a resource for families looking for budgeting and frugal living tips. Her personal experience becoming debt free as a one income family drives the content and resources and provides the tools and insights other families need to successfully manage their finances, reduce their spending and reach their financial goals.
Jeremy Rose has ten years’ experience as a hosting provider and has been running a highly successful telecoms business from the town for 20 years.
Shane Walker is the executive VP & CMO at ProActive FinTech LLC. He gives people better control of their finances by digitizing the successful concept of the envelope system for budgeting. At ProActive Budget, they’ve combined the modern convenience of a debit card with the proven budgeting system of using envelopes. It works because it requires a person to consult their budget before they spend. It changes the behavior of spending money.
After 13 years as a successful operations manager working at two different ‘Fortune 1000’ companies, Dr. Timothy G. Wiedman spent the next 28 years in academia teaching college courses in business, management, human resources, and retirement planning. Dr. Wiedman recently took an early retirement from Doane University (@DoaneUniversity), is a member of the Human Resources Group of West Michigan and continues to do annual volunteer work for the SHRM Foundation. He holds two graduate degrees in business and has completed multiple professional certifications.
5 Questions to Ask Yourself Before Taking out a Cash Advance
Short-term cash advances come with many downsides that could trap you in a cycle of debt, so make you shop prepared!
Cash advances can seem like a good way to paper over a hole in your budget: They’re fast, they’re easy, and you can pay them back with your next paycheck. But there’s a lot more to these short-term small-dollar loans than meets the eye.
Before taking out a cash advance loan, make sure answer these five questions so that you don’t end up in an even bigger financial hole than the one you started in.
1. What’s the interest rate?
Cash advances are a type of short-term no credit check loan; in many ways, they’re basically the same thing as a payday loan. With average principal amounts of a few hundred dollars and an average repayment period of two weeks, they’re meant as nothing more than an “advance” on your next paycheck.
And yet, cash advances also come with some significant downsides: Namely, they cost way more than a traditional personal loan or even other types of bad credit loans. While any loan that you take out when you have bad credit is going to cost more than a regular loan, the high price of cash advances should give you pause.
At first glance, their interest rates won’t seem so bad; the average interest rate for a cash advance is only $15 per $100. That’s not bad at all! Except … that it is. Those short repayment terms obscure how much a cash advance will cost in comparison to other loans.
In order to determine the true cost of your cash advance, take a look at its annual percentage rate (APR). This will give a standardized measure to use when comparing costs between a loan you pay back in two weeks and an installment loan that you’d pay off over a year or more.
Here’s the truth: The APR for a two-week cash advance with a $15 per $100 interest charge is a staggering 391 percent! That’s a lot! And while a sky-high APR might not worry you so much when you’re planning to pay the loan back in a week or two, there’s a good chance that those interest charges will start adding up …
2. Can I afford to pay this off?
If you pay off your cash advance on the original date it’s due, the amount of money you’ll be paying towards interest is fairly reasonable; a 15 percent rate might be a little on the higher side for a personal loan, but if you have poor credit, that 15 percent is going to be totally fine.
Still, you really do need to ask yourself whether or not you can afford this loan. Instead of looking at the interest rate, look at the size of the payment.
If you were to take out a $300 cash advance with a 15 percent interest charge, your payment amount would be $345. Given that you need the $300 right now, is $345 really something you can afford to pay back in only a few weeks?
Research suggests otherwise. In fact, a study from the Pew Charitable Trusts found that well over 80 percent of payday loan borrowers didn’t have the money in their monthly budget to cover their loan payment. And if you’re counting on the lender to only lend you a loan you can afford to pay back, think again …
3. Will this lender check my ability to repay?
When a borrower takes out a cash advance loan that they can’t afford, they’re often faced with a choice between two outcomes, neither of which is good.
If they’re in a state where the practice isn’t banned, the borrower could choose to roll over their loan. This means that they make a nominal payment—usually covering just the interest owed—in order to extend the loan’s due date. That new loan term comes with a fresh interest charge, doubling the cost of their cash advance in one fell swoop.
The other choice that borrowers have in situations like these is to reborrow, whereby they pay the first loan off and then immediately turn around and take out a new one. In many ways, reborrowing is no different from rolling a loan over; borrowers are still paying extra and remaining in debt.
This can kick off a process known as a cycle of debt, wherein a person keeps throwing more and more money towards interest and other fees while never actually bringing themselves closer to being debt free. With payday loans and cash advances, this cycle can be especially fierce. The Consumer Financial Protection Bureau (CFPB) estimates that the average payday loan customer takes out 10 loans per year and spends almost 200 days in debt.
When a traditional lender checks your credit score during the application process, they are looking to see whether you can pay back the money you’re looking to borrow. But with no credit check loans and cash advances, lenders not only don’t check people’s credit scores, but many of them don’t do anything to confirm whether or not these people can afford their loans at all!
So when you’re considering a cash advance loan, take a few moments and see whether or not this lender is checking your ability to repay. If they’re not, that might be a sign that they’re actually counting on their customers having to roll over and reborrow their loans; after all, additional money paid towards fees and interest helps their bottom line.
If that’s the case, then it’s also a sign that you should take your business elsewhere.
4. Will this help my credit score?
This will be a pretty easy question to answer. When it comes to short-term no credit check loans and cash advances, you’ll be hard-pressed to find one that helps your score.
While pretty much every traditional lender and credit card company reports payment information to the credit bureaus, the practice is much rarer with non-prime lenders—especially ones offering short-term products that are paid off in a single, lump-sum balloon payment.
To put it simply: Lenders that don’t check their customers’ credit scores before lending to them often don’t feel much of a need to report the information that helps shape those scores in the first place.
But this isn’t true of all bad credit lenders. Some, including OppLoans, do report their customers’ payment information, which means that making your loan payments on-time could help improve your score. Installment products, which feature multiple, smaller payments instead of a single balloon payment, also provide borrowers with more opportunities to build a positive payment history.
5. What are other customers saying?
Finally, before you sign your name on the dotted line or click “I agree” on that online loan agreement, take some time to research a potential cash advance lender and see what other customers have to say about them.
Don’t just do a cursory Google search either. Check out their customer reviews on lending platforms and social media. Go to their BBB page and see what kinds of complaints have been lodged against them and whether they’ve been able to resolve them.
Taking out a small-dollar cash advance loan might seem like no big deal, but the risks involved are greater than you probably realize. Taking the time to answer these questions will ensure that you find the loan (and the lender) that’s right for you.
The best way to avoid short-term cash advance loans is to build up an emergency fund and improve your credit score. To learn more about financial best practices, check out these related posts and articles from OppLoans:
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.
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:
Cash Advance Loans: Here’s 4 Things You Should Know
Cash advance loans are supposed to be an easy way to cover emergency expenses, but they could end up trapping you in a long-term cycle of debt.
When you need money and you need it fast, taking out a cash advance might seem like your best option—especially when you have lousy credit. But there is more to these seemingly simple loans that meet the eye.
Before clicking “I agree” on that online loan offer or heading down to your neighborhood check-cashing store, here are four things you really need to know about cash advance loans.
1. Cash advance loans are paid back quickly.
When it comes to short-term no credit check loans, the terms “payday loan” and “cash advance” are almost interchangeable. Both names do a good job of describing how the loans work: They’re meant as an “advance” on your next paycheck designed to be repaid on your following payday.
That’s why the average repayment term for a payday cash advance is only 14 days. They’re meant to be a form of quick-and-easy bridge financing that lets you cover unexpected costs or paper over a pre-paycheck shortfall.
14 days (or seven days or one month) sounds kind of nice. You’re able to get the money you need and get out quick! But those short terms can come back to bite you, especially when combined with the next two items on this list.
2. Cash advance loans also have sky-high interest rates.
When you have bad credit, you are going to end up paying more for personal loans and credit cards. That’s simply unavoidable. A low credit score tells lenders that you’re not the most reliable borrower; many traditional lenders won’t lend to you at all.
But with cash advance loans, you’ll end up paying much higher rates than you will with other types of bad credit loans. Even a rate that seems very reasonable is going to be many times higher than the rates for a regular loan.
The average interest rate for a cash advance loan is $15 per $100. Doesn’t sound too bad, right? Well, here’s the thing: A flat 15 percent rate is really high for a loan that’s only two weeks long!
When you compare annual percentage rates (APRs), it quickly becomes clear just how much pricier these cash advance loans are. A regular personal loan will have an average APR anywhere between 6 and 36 percent; a cash advance loan with a 15 percent rate, on the other hand, has an APR of 391 percent!
3. You pay off cash advances in one lump sum.
Cash advance loans can be difficult for many borrowers to repay on time. And while high rates are certainly a factor, there’s a lot more to it than that. One of the other major factors is how these loans are designed to be repaid.
Most personal loans are structured as amortizing installment loans. With these products, you pay off the loan in small increments over time, with each payment going towards both the loan principal and the interest owed.
But short-term loans like cash advances and title loans are designed to be paid back in a single ballon payment that includes all the principal and all the interest. This is referred to as a “lump sum repayment” model, as the loan is repaid in a single lump sum.
Let’s say you take out a two-week payday loan for $300 that carries a 15 percent interest charge. In 14 days, on the loan’s due date, $345 will be automatically deducted from your check account. Now ask yourself: Is that a payment you would actually be able to afford?
According to a report from the Pew Research Centers, many payday loan borrowers cannot. They found that well over 80 percent of payday loan borrowers didn’t have the funds in their monthly budget to cover their loan payments.
Much of this difficulty is due to the lump-sum repayment model, which creates individual payments so large that borrowers struggle to afford them. This leads us to the fourth thing you should know about payday cash advances …
4. Cash advance loans can easily snare you in a debt trap.
When a borrower can’t afford to make their payment on a cash advance loan, they are usually faced with two options: rollover or reborrow.
Rolling the loan over means that the customer extends the loan’s due date in return for an additional interest charge. Oftentimes, they will only have to pay off the original interest charge in order to do so. Loan rollover is a practice banned in many states.
Reborrowing the loan simply means that the borrower pays back the original loan and then immediately takes out another. In certain states, borrowers have to wait out a mandatory “cooling off” period before they can take out another payday loan.
When a cash advance borrower rolls over or reborrows their loan, they are taking the first step in a cycle of debt. Since they can never afford to pay off their debt entirely, they are constantly racking up additional charges—essentially paying more and more each time to borrow the same amount of money.
Statistics back this up. Research from the Consumer Financial Protection Bureau (CFPB) found that the average payday loan customer took out 10 payday loans a year and spend almost 200 days in debt annually.
There are better options out there.
Remember when we talked about those sky-high APRs for cash advance loans? They might not mean much for a 14-day loan, but for a 200-day loan? That’s a different story. In the end, the most important thing you should know about payday cash advances is that they should be avoided at all cost.
Lastly, you could consider a bad credit installment loan, one with lower rates and more manageably-sized payments. Even better, some lenders (like OppLoans) report your payment information to the credit bureaus, which means that paying your loan back on time could help boost your credit score.
To learn more about how you can improve your financial situation, check out these related posts and articles from OppLoans:
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