What's the difference between a balance transfer and a cash advance?
Balance transfers and cash advances are features of credit card accounts designed to give consumers access to cash for different purposes. A balance transfer allows a consumer to transfer the balance of one credit card to another as a way of refinancing the debt. Cash advances allow a consumer to access cash from a credit card via an ATM, a bank withdrawal or a check from the credit card company.
Balance transfers can be a very effective way of refinancing credit card debt to save money. By transferring the balance of one credit card to another credit card with a lower annual percentage rate (APR), consumers can save money in interest payments. For example, if a balance of $1,000 on a credit card that has a 15% APR is transferred to a credit card that offers a 12% APR, the consumer saves 3% in interest payments. Some credit card companies offer specials to consumers for balance transfers. Special offers often include a 0% interest rate for approved customers over a specified period of time. Additional benefits of balance transfers can include reward points or travel miles.
It is important to read the fine print regarding balance transfers. There is often a one-time transaction fee that may be as much as 2% or 3% of the transfer amount. It is also important that consumers make payments on time and in full within the allotted period. Failure to make payments can result in forfeiture of the special offer and having a much higher interest rate applied to the remaining balance.
Cash advances allow credit card customers to access cash for any reason. Cardholders obtain a cash advance by visiting an ATM, bank or other financial institution, or by requesting a check from the credit card company. Cash advances are not an ideal method of obtaining cash because they carry very high interest rates and the credit card company begins charging interest immediately rather than allowing a grace period.
Some credit card companies periodically send checks in the mail as a way to entice consumers into using a cash advance. They position the checks as a special offer to treat customers and only include the terms of the advance in very fine print that is easily missed. Besides charging a higher-than-normal interest rate, credit card companies also automatically charge a transaction fee of 2%-4% when the check is cashed. Another important point to remember is that cash advances do not typically qualify for rewards or other credit card benefit programs.
Like balance transfers, cash advances can be a good resource in certain circumstances. However, it is important for consumers to understand the terms of the agreement, including interest rates and one-time fees, before proceeding with these transactions.