When witnessing a monetary crunch, you might be tempted to extract cash through your credit card. Availing a cash advance on your credit card is simple. All you must do is utilize your credit card to withdraw the amount you need. It is very convenient, and you can avail cash immediately. However, before you select this specific option, ensure to understand the impact of the cash advance option on your finances and credit score. Here in this article, we will try and explore the impacts of your score on cash advance and vice versa.
What is meant by a cash advance, and how does it function?
A cash advance means to withdraw cash through your credit card at the ATM. The maximum amount that you can easily withdraw is based on the credit card type and limit. When you avail of the option of cash advance on your credit, the amount that you withdraw plus the additional cash advance fees and finance charges on the card are added to your card balance. It is even mentioned on your card statement, the same as your other regular purchases through the card.
Here are 2 major points you must know about cash advances:
Firstly, cash advances must have a higher interest rate (APR) than regular card transactions.
Next, there is zero way you can avoid paying the interest component on the cash advance option. Unlike regular credit card transactions with up to 55 days grace, the interest component on withdrawal of cash begins incurring as soon as you opt for this option. And continues incurring until you repay the full cash withdrawn amount along with charges in full.
To state it simply, cash advances are extremely expensive than the regular use of credit cards. Thus, this option should be only used when you are in instant need of money.
Do you require having a higher credit score to opt for the cash advance option?
No, your credit score will not be reviewed when you withdraw cash through the credit card. The cash withdrawal amount is usually determined at the time when the credit card is issued, and your credit history or score does not impact it. You can withdraw the cash whenever required based on the cash limit that comes with your credit card. Alternatively, you can even check the limit provided to you by calling the creditor or through net banking.
Will availing cash advance impact your credit score?
A cash advance does not directly affect or impact your credit score. However, it impacts different other parameters that make up your score, causing your credit score to decline. Let us go deep into it to understand the relationship between credit score and cash advance option.
The cash advance option is not mentioned in your credit report. However, the amount withdrawn is mentioned in your credit card statement. It enhances your credit card balance, which may hurt your credit score. Usually, a credit card balance must account for up to 30 percent credit of the available credit balance. Crossing this limit may show you as a credit-hungry individual, which in turn may lower your credit score substantially.
As stated above, cash advance options are costly and enhance your thorough debts. It makes it extremely challenging to repay your other debts. Failure to repay the necessary debts on time is mentioned in your credit report, which hurts your score in the long term.
Thus, though opting for a cash advance option may not directly affect your score, it can hamper other crucial parameters making your score fall. Thus, if you have availed of this option, ensure to check the free CIBIL score to figure out any fall in a score. Alongside this, also ensure to check for any mistakes or discrepancies in the report. If you find any mistake, please report it to the concerned body for correction. For rectification, you can even contact the CIBIL customer care number.
Other important alternatives to cash advance options
The cash advance option is costly and can impact your score indirectly. Thus, if you are in a monetary crunch, here are other important alternatives to raise the money instantly without availing of a cash advance:
Utilize your debit card: Use a debit card to withdraw the money from your bank account. As you are withdrawing money in India from your savings account, there will be zero interest or any withdrawal fees. Based on the amount withdrawn and ATM used, you might require repaying a nominal ATM usage charge of around Rs 10 or 20.
Choose the personal loan option: Interest charged on the personal loan usually is lower as compared to what is charged by the credit card. Moreover, availing of personal loans and timely repaying the EMIs are mentioned on the credit report, which helps you to improve your credit score.
Avail a payday loan: Note that payday loans usually are instant in nature and are provided to salaried individuals. You can get these loans within the same day of the application if you meet all the criteria set by the lender. However, ensure to compare the rate of interest and repay its EMI on time to avoid facing a debt trap.
Use the contingency fund: This is not the way to raise money instantly, but it is the best method you can depend on when you need instant cash. Begin by forming an emergency fund of at least 6 times your monthly mandatory expenses. You can use this amount to meet your future emergencies. Note that having contingency funds acts as a kind of financial cushion that can completely depend on whenever you require funds. Ensure to build the fund again if you use it.
Be cautious when using the cash advance option.
A cash advance option does not impact your credit score in a direct way, but it holds the potential to hamper your credit score drastically indirectly. Routing for this option enhances your overall credit utilization rate and debt, all of which have a potential negative or adverse impact on your credit score. Thus, ensure to weigh the pros and cons before availing of this option. Check for alternative options to meet your emergency requirements instantly.