Consumers often confuse balance transfers with cash advances, and for good reason. The two share some commonalities, especially now that balance transfer checks are quite common.
But there are glaring differences, which I’ll discuss right this second because they can get you into trouble quick and cost you lots of money.
A credit card balance transfer is essentially an offer from one credit card issuer to pay off your existing debt with another credit card issuer.
For example, Citibank may offer to pay off your existing Chase credit card balance via a credit card balance transfer.
Typically, the offer will come in the form of a 0% APR balance transfer, enough to entice even the most discerning cardholder.
A cash advance, on the other hand, is essentially a personal loan that instantly accrues interest. Cash advances typically come with a high variable APR, usually in the 20% range, and may be laden with hefty fees as well.
In fact, the APR on a cash advance is usually higher than the interest rate on the most expensive credit cards.
Similar to balance transfers, cash advances can be utilized to pay off debt, but are generally only worthwhile in times of great need, when no other option is available.
For example, when you need money to pay off something else, even if it costs you an arm and a leg in the process.
When it comes down to it, it probably wouldn’t make a lot of sense to use a cash advance to pay off credit card debt because the APR on the cash advance would likely be higher.
Cash advances are better positioned to be used as a source of cold, hard cash, as the name implies, only when absolutely necessary. And even then, you have to wonder if they’re worth it.
So why the confusion between the two?
Well, balance transfer checks can easily be confused with the so-called “convenience checks” you may receive in the mail from your credit card issuers. You know, the ones that show up in your mailbox on what feels like a daily basis.
The big distinction is that convenience checks are often cash advances, while balance transfer checks are simply more flexible balance transfer offers that give customers the option to get cash or pay off another credit card balance (or any other outstanding loan) using a check.
Additionally, some banks and credit unions may actually refer to a balance transfer as a cash advance even though they aren’t one and the same. For example, you may come across a balance transfer that has “no cash advance fees.”
In reality, it’s probably a balance transfer but the bank refers to it as a cash advance for some unknown reason. Be cautious here to ensure you aren’t charged exorbitant fees associated with traditional cash advances. But also be hopeful the bank is just using a misnomer. It’s a good sign if they aren’t charging any fees.
In summary: Balance transfers typically have 0% APR or a low fixed rate, and can be used to pay off expensive debt, while cash advances generally have a very high variable APR, and should be reserved for emergency use only, if that.