Credit checks are an inevitable part of any loan application process. It's when credit companies look at the information on your credit report to check your financial history. To assess your solvency and the risk of lending to you, lenders must run these checks.
There are two kinds of credit check: hard and soft inquiries. Of the two, hard credit checks can knock a few points off your credit score if the lender turns down your application based on what it sees. In contrast, soft credit inquiries won't affect your credit score even though they still involve someone checking your score.
So, when taking out a loan, ideally you want an option that only runs a soft inquiry. The thing is, this usually only happens once you receive an offer from a lender. The good news is that there are other borrowing options that won't dent your score, regardless of credit checks. Check them out here.
Credit card cash advances
Credit card cash advances are loans taken out from a credit card account. Taking them out won't directly affect your credit score since they're not registered separately from your other credit card transactions on your credit report. This means the credit scoring algorithms cannot differentiate a cash advance from a regular credit card transaction. This also means your credit history won't indicate that you have taken a cash advance.
However, the algorithms will see that you have a higher credit card balance. This is because the credit card cash advance is added to your credit card balance. The other consideration is that if the cash advance pushes your credit utilisation rate too high, or you fail to pay it on time, it will negatively impact your credit score.
Merchant cash advances
Merchant cash advances (MCA) are considered alternatives to small-business funding. They're short-term loans that have a repayment timeline based on sales. In simple terms, providers buy your future sales, and you repay them with a percentage of your sales over time.
Since MCAs are considered sales of future revenues, they're not technically a loan. They're repaid when receivables come in, rather than using an amortisation schedule. This means they're not reported to credit bureaus and won't impact your credit score.
Your credit score won't take a hit - even if you fall behind on your payments. The only possible time it'll affect your credit is when MCA providers pursue defaults through court-recorded judgments.
Cash advance loans
Cash advance loans are short-term financing solutions that tide you over until your next pay cheque. They're also known as payday loans. They're consumer-controlled, so you can choose how much you want to borrow and how long your repayment term will last. They can be useful if you need cash in an hurry (an unexpected repair to the company vehicle, for example) since they're available online 24/7 and have no restrictions on their use.
Taking out a cash advance loan doesn't affect your credit score as most payday lenders won't check your credit score. Nevertheless, if you're unable to repay it on time or in full can be very damaging to your credit score and can get very expensive, very quickly. While the Financial Conduct Authority (FCA), the United Kingdom's financial regulatory body, strictly capped interest rates for payday loans at 0.8% per day, their APR could still be as high as 1,500%.
Personal loans
If you're experiencing financial strain and need immediate funds for an emergency, opting for a personal loan instead of a cash advance loan option can save you hundreds of pounds in interest charges. These instalment loans are called personal loans since they can be used for various personal purposes, such as large purchases, emergency expenses, debt consolidation, and much more.
Apart from their varied usage, personal loans are well-known for their relatively easy application process. Typically, you don't require collateral or security and they are offered with minimal documentation. Since they're a form of instalment credit (not revolving credit), they don't factor into your credit utilisation, so they won't hurt your credit score either.
Buy now, pay later
You've probably been offered Buy Now Pay Later (BNPL) products at various online checkouts. They're a form of borrowing offered by a separate credit provider, not the retailer you're buying from. The best part of BNPL arrangements is that they don't charge any interest rates or fees on the amount you've borrowed, as long as you keep to your agreed repayment schedule.
Like the other borrowing options on this list, applying for a BNPL agreement can't damage your credit because they only involve a soft credit check. Soft inquiries are neither attached to a specific credit application nor indicate greater risk, so they don't affect your credit scores.
However, the FCA doesn't regulate BNPL agreements that are less than a year old. This means that if something goes wrong, you won't get the same level of consumer protection.
Final thoughts
In a nutshell, accessing credit card cash advances, MCAs, payday loans, personal loans, and BNPLs won't affect your credit score. They'll only significantly impact your credit if you fail to make the agreed repayments in full and on time. You can minimise this risk in several ways. Set up autopay and calendar reminders, adjust your payment due dates, sign up for payment reminders, and consider a debt management plan to ensure you can make full and timely repayments.
Copyright 2022. Article was made possible by site supporter Tiffany Wagner.