Balance Transfers vs. Cash Advances

At first glance, a 0 balance transfer and a cash advance from a credit card appear to be the same thing. They both put money in your pocket to pay high interest credit card balances or other debt. But these two methods of getting cash from your card are as different as night and day. And knowing the difference can literally save you hundreds of dollars.

Balance Transfers

A balance transfer is a special feature offered by many credit card companies, typically at a low or even zero interest rate. With a balance transfer, a cardholder can pay off other high interest credit cards. By moving high interest debt onto a low or no interest balance transfer card, one can save money by reducing or even eliminating the amount of interest paid each month.

Most 0% balance transfer offers must be used when a cardholder first applies for the credit card, or within a short time thereafter (typically 3 to 6 months). Many balance transfers after that charge higher interest rates.

The 0% APR on balance transfers doesn't last forever. Typically, these no interest deals last for six to 12 months. Currently, the longest 0% balance transfer option is 12 months. And finally, most card companies charge a balance transfer fee, generally 3% of the amount transferred. There are some no fee balance transfer options, although these last for just 6 months.

Cash Advances

Cash advances differ from balance transfers in several important respects. First, and most importantly, cash advances do not come with 0% introductory rates. In fact, most cards charge a special rate for cash advances, which is typically higher than the card's interest rate on regular purchases. Cash advance interest rates can easily reach 20% or more.

Second, cash advances can put money in your pocket. With most balance transfer deals, the money is paid directly from the balance transfer card to the high interest credit card balance. The money is generally not sent directly to the cardholder. With a cash advance, the money is sent to the cardholder to spend as he or she wants. While this is an advantage over balance transfers, it comes at a very high cost as noted above.

Finally, it's worth noting that a cash advance also comes with a fee in addition to a high interest rate. Cash advance fees vary from card to card, but generally are about 3% of the amount of the cash advance.