Cash Advance and Credit Checks

3rd Dec 2024

Sometimes, you may find yourself needing cash quickly but lacking sufficient funds in your bank account. It happens to all of us, especially when you have an unexpected expense and pay day is still two weeks away. In such cases, a credit card cash advance can be an option. This involves using your credit card in a cash machine to take out cash rather than using it to pay for items in a shop. While convenient, cash advances can be costly due to additional fees and higher interest rates compared to regular credit card transactions. Appearing to be reliant on cash advances can also have a significant effect on your credit rating.

Credit Cards vs. Debit and Prepaid Cards

Credit cards differ significantly from debit cards and prepaid cards. Debit cards, linked directly to your bank account, do not incur extra fees or charges when withdrawing your own funds. Prepaid cards, often used for budgeting or travel overseas, also draw from preloaded funds. Credit cards on the other hand are seen as a way of borrowing cash, which has to be paid back with interest.

How Does a Credit Card Cash Advance Work?

To get a cash advance, you can simply use your credit card at an ATM, much like you would with a debit card. However, this convenience comes at a cost. There are typically two types of fees associated with credit card cash advances:

·        Cash Advance Fee: This is a percentage of the amount you take out, charged every time you take out cash. To minimise costs, withdraw the total amount you need in one go rather than making multiple smaller withdrawals.

·        Interest Charges: Interest on cash advances usually begins accruing immediately, often at a higher rate than on regular purchases. This interest continues to accumulate daily until the full balance is repaid.

Cash advances overseas are perhaps more common, but will have the same impact on your credit score as cash taken out on a credit card from an ATM in the UK. Instead, look at the travel cards which you can load up with cash and use overseas with no penalties or effect on your credit rating.

Impact on Your Credit Score

Using a cash advance can affect your credit score, as it is can signal potential money management issues. Multiple cash advances in a short period may raise concerns for lenders and negatively impact their decision to offer you credit if they think you are already struggling to manage your money.

Cash advances and loans can provide quick access to funds but operate differently. Loans typically involve a fixed lump sum, set repayment terms, and agreed-upon interest rates. In contrast, a cash advance lacks a structured repayment plan and can become increasingly costly the longer it remains unpaid. Moreover, unlike loans, cash advances are limited to your credit card's specific rates and fees. If you struggle to manage to repay the initial cash advance and then borrow more, you can get into a vicious circle which it is hard to break free from.