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Payday is, for some, a mini personal celebration that happens one or two times per month. For others, payday is a welcome relief to help afford the necessities of life. For many Americans, living paycheck to paycheck is an unfortunate way of life, especially during the pandemic.

The gap between paydays can seem to stretch on and on. To combat this, some app developers have stepped in with a proposed solution: paycheck advance apps. A way to get your paycheck early sounds like a dream come true, but what’s the catch?

How do cash advance apps work?

There are multiple forms of payday advance apps, as they’re a relatively new technology that is taking various approaches to the service.

Some apps are partnered with an employer, such as Branch or PayActiv, but not all companies offer the service. These types of apps aren’t a loan, but rather allow you to directly access a portion of your paycheck early, in accordance with the partnership.

The more common form of paycheck advance apps work via lending. These apps don’t communicate with your place of employment and negotiate additional paydays for you. Instead, they use loans that will lend you money until your actual pay date. Your paycheck is used as collateral to get a cash advance. Then, when your actual payday comes around, the amount borrowed is automatically deducted from your checking account.

Like many financial services, you need to have proof of a steady income to sign up for many of these apps. There is often also a limit to how much the user can advance per period, which varies across apps. This amount can range anywhere from $50 to $500.

Do cash advance apps indicate a larger problem?

In the event of unexpected hard times, cash advance apps can be of great assistance. However, they should never be your first line of defense. Proper budgeting, a solid emergency fund, and financial counseling are more solid long-term safety nets that you can begin working on at any time and adapt to fit your needs. Early or ongoing use of paycheck advance apps may demonstrate a lack of preparedness or a cash shortage.

If you’ve run out of money from your current paycheck and are borrowing against the next, you may into get into a cycle of running out of money faster and faster. Evaluate where your money is going. Ask yourself the following questions:

• What is my monthly income without the use of paycheck advance apps?
• How much do my monthly bills and necessities cost?
• Am I overspending on non-necessities, subscription services, or impulse purchases?
• What debts do I currently have and what are there interest rates?
• Is there a way I can earn more and spend less?

Do paycheck advance apps affect my credit?

You may have heard that payday loans are an example of a high-risk behavior in your credit report. Their predatory practices and high interest rates often get those already struggling into deeper trouble.

While most payday advance apps typically are free or charge a small fee, they are relatively new and therefore have many questions surrounding how they operate. Because every app can operate independently, there is no universal paycheck advance experience. Some of the more famous apps, such as Earnin, have been investigated in recent years for avoiding conventional lending regulations. Some apps are free but recommend leaving a “tip” of your choosing for using the service, which also skirts regulations.

Since these apps traditionally don’t report to credit bureaus, your credit score won’t be hurt by using them. On the other hand, these apps also don’t help build your credit either, the way other forms of lending do, such as at a credit union or bank. Keep in mind that your credit score is not the only indicator of financial health, though, and that relying on cash advances is harmless without the reporting.

What are my other options?

If you’re going to be borrowing money, you want to be sure that you borrow from an insured and reputable financial institution. These apps may be tempting due to their convenience and simple marketing, but you never want to put your financial future into the hands of an unknown lender.

A secured credit card is a good option for those who wish to borrow small amounts and build their credit score at the same time. Secured cards use your own cash as collateral and are a safe way to create a foundation for a strong financial future.

Consider speaking with a financial counselor at your local credit union. All of American Heritage’s Member Service Representatives are ready to offer solutions and direct you to resources that will not only help your current situation, but give you the tools you need to avoid getting stuck in the same borrowing loop.

Contact us at your local branch, on the phone, or online with our Video Advisor service (also known as VANA) to get started today. We will be happy to help you build healthy spending and saving habits for a better future.