Balance transfers can be a useful way to consolidate date, but watch out for the standard cash advance rate that you could collect when the promotional offer ends.
Balance transfers can help you repay your debt faster and without the cost of high interest, but not that these promotional offers are usually only in place for a few months. When the introductory offer ends, your balance will start attracting the revert rate. This is usually either the standard purchase rate or the much higher interest rate that applies to cash advances.
If you don’t think you’ll be able to repay your entire debt by the end of the given promotional period, consider a balance transfer card that reverts to the standard interest rate rather than cash advance rate. While you’ll still collect interest and have to make regular repayments, it may be a more cost-effective alternative.
Why do cash advances cost more?
Cash advance rates generally apply to ATM withdrawals, foreign exchange payments and gambling transactions. This varies from card to card though, so check your relevant product disclosure statement to confirm what your provider considers a cash advance. Unfortunately, cash advances incur much higher fees than other transactions made with most credit cards.
Cash advances generally cost more than purchases because when you purchase goods on your credit card the merchant is charged a fee by the banks for providing the credit card service. Consequently, the bank is getting a financial benefit from the service via the merchant, so they can afford to keep the interest on purchases at a lower rate. This doesn’t apply to cash advances as there is no intermediary for the bank to recover any fees or commissions from.
If I do a cash advance and a balance transfer on the one card, which is repaid first?
As well as the revert rate, another reason balance transfers and cash advances don’t mix well is because of the payment hierarchy. When you make repayments, the bank must direct your payments to the balance collecting the highest interest. In this case, if there’s a low or 0% balance transfer promotion in place, your payments will be directed to paying off your cash advance first rather than your balance. If you only have a few months to repay your balance, you’ll be wasting time and money paying off your cash advance rather than your existing debt.
If you’re comparing balance transfer credit cards, check what the revert rate will be before applying. To determine whether you can avoid the revert rate, consider the size of your debt, the promotional balance transfer rate and the length of the offer to calculate whether you can repay your balance before your balance starts collecting the cash advance rate. If you can’t, consider a card with a longer promotional period or a lower revert rate.