Understanding Balance Transfers and Cash Advances: A Comprehensive Guide

At O1ne Mortgage, we prioritize consumer credit and finance education. In this blog, we will delve into the intricacies of balance transfers and cash advances, helping you make informed decisions about your financial health. If you have any mortgage service needs, feel free to call us at 213-732-3074. Our team is here to assist you!

What Is a Balance Transfer?

A balance transfer involves moving a balance from one credit card to another. This is often done to pay off a high-interest-rate balance by transferring it to a card offering a temporary 0% APR. If the new credit limit is sufficient, balance transfers can also help consolidate multiple credit card balances into one.

Pros of Balance Transfers

Balance transfers offer several benefits, especially when you can take advantage of a low promotional interest rate:

• Get a break from interest: Depending on the offer, you may get up to 21 months to pay off your transferred balance without paying any interest.
• Consolidate multiple balances: Transferring multiple balances to a single credit card simplifies your payments, reducing the number of due dates to manage.
• Pay debt faster: With 0% interest, your full payment goes towards the balance, helping you pay it off more quickly.

Cons of Balance Transfers

However, balance transfers also have some drawbacks:

• Balance transfer fee: These transfers often carry a fee of 3% to 5% of the transaction amount, which can increase the overall cost.
• Temporary low rate: The promotional rate is temporary, so you need to pay off the balance before it expires.
• Higher risk of new debt: With your old credit limit freed up, you might be tempted to accumulate more debt.
• Restrictions: Transfers from the same credit card issuer are generally not allowed, and there may be a time limit for taking advantage of the promotional offer.

What Is a Cash Advance?

A cash advance allows you to borrow cash from your available credit, essentially acting as a short-term loan on your credit card. You can get a cash advance by withdrawing cash from an ATM, visiting a bank branch, using a convenience check, or making a cash-like transaction.

Pros of a Cash Advance

Using your credit card for a cash advance has some advantages:

• Access cash in an emergency: In situations where you don’t have access to your debit card or checking account, a cash advance can provide quick cash.
• No credit check: As long as you have available credit, you can get cash without applying for a new loan or undergoing a credit check.
• Convenient payments: Depending on your credit card terms, you can repay a cash advance over time by making minimum monthly payments.

Cons of a Cash Advance

Despite the convenience, there are significant drawbacks to using a credit card for a cash advance:

• Higher interest rate: Cash advances often carry the highest possible APR on a credit card, making them more expensive than purchases or balance transfers.
• Cash advance fee: The fee, often between 3% and 5% of the transaction, increases the cost. Additionally, ATM withdrawals may incur extra fees.
• No grace period: Interest starts accruing on the day of the transaction, with no grace period to avoid finance charges.
• No purchase disputes: You can’t file a billing dispute for purchases made with a cash advance, so you’ll need to resolve any issues directly with the merchant.

When Should You Use a Balance Transfer?

Consider using a balance transfer to pay off high-interest debt, pay off a large purchase, or combine multiple balances for easier management. Ensure you can afford the payments to pay off the balance before the promotional rate ends. Typically, you need good credit to qualify for the best low-interest rate promotions.

Why You Should Avoid Cash Advances

Cash advances come with numerous fees and high costs. They carry a higher interest rate, incur a cash advance fee, and do not have a grace period. Paying off a cash advance can be challenging if you have other balances on the same card, as minimum payments often apply to the lowest interest rate balance first.

Alternatives to a Cash Advance

Before opting for a costly cash advance, consider these alternatives:

• Use your emergency fund: This savings is set aside for unexpected expenses. If you don’t have one, start saving a small amount from each paycheck.
• Charge a transaction on your credit card: Depending on your situation, consider making a purchase on your credit card instead of using cash.
• Get a payroll advance: Ask your employer for an advance or use a salary advance app to access your next paycheck sooner.
• Apply for a personal loan: While not the fastest option, a personal loan offers more spending and repayment flexibility.
• Borrow from family or friends: This can be more cost-effective, but ensure you keep your payment agreement to avoid straining relationships.
• Change your plans: If possible, postpone the purchase and explore other ways to save for it.

The Bottom Line

While a balance transfer can be a useful tool for managing credit card debt, cash advances are generally not advisable. Explore alternatives before using your available credit for cash. If you’re considering a balance transfer to consolidate credit cards or pay down high-interest balances, check your credit report and score first. Understanding your credit can help you narrow your options and compare balance transfer offers you’re likely to qualify for.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with the best solutions tailored to your financial situation.