No one likes the reality of being in debt, but for millions, serious debt is a part of everyday life. In fact, debt is something that all generations face. More than 81% of millennials are in debt. Older generations also face debt; 79.9% of Gen Xers and 80.9% of baby boomers owe money to lenders.
While there are many different avenues that one can take to get out of debt, many are unsure which option is best for them. One option that people don’t often consider is using a credit card. Since credit card debt is so widespread, most avoid the idea of opening a new card to reduce their debt load.
When used properly, a credit card can be a great tool in fighting debt. Keep reading to learn how cash advances and balance transfers can be used to pay off debt.
Using Cash Advances to Reduce Debt
A cash advance allows you to withdraw cash from a credit card, similar to taking out money on a debit card or from an ATM. However, unlike other cash withdrawals, cash advances must be paid back, just like any other charge you make on a credit card. With a cash advance, you’re “buying” cash versus buying a product or service.
So how can a credit card cash advance be used to pay off debt? Depending on the type of credit card, you may be able to borrow cash at a low interest rate. You can then use this money to pay off the balance on existing debt.
It’s most beneficial to use this option to pay off high-interest rate debt, such as a personal loan or credit card debt. But before taking out a cash advance, you want to ensure that cash advance fee outweighs the interest rate on the debt you plan to pay off; otherwise, a cash advance doesn’t make much sense.
When taking out a cash advance you want to:
- Take out the least amount possible
- Pay it off quickly
- Be aware of the total fee you face (cash advance fee plus ATM fee)
Before taking out a cash advance on a credit card to pay off debt, ensure that the fees outweigh the current interest rates that you face.
Balance Transfers and Paying Off Debt
Most people use credit cards to make purchases, but did you know you can also use them as a way to transfer debt? With a balance transfer, you can move debt from another credit card or loan onto a low interest rate card.
Depending on your credit health and score, you may even qualify for a qualify for a 0% APR credit card, meaning you pay no interest on the money you transfer to the card. Some lenders also offer no or low balance transfer fees, allowing you to save even more money now and in the long run.
So when should you consider using a balance transfer to pay off debt? The most important factor to consider is the interest rate and balance transfer fee. For this option you’ll want to find a lender that offers a 0% interest rate APR and no balance transfer fee. With this, you have a set promotional period in which you can pay off the transferred debt. Most promotional periods range between six months to a year.
By transferring debt onto a low or no interest rate credit card, all of the money you pay goes towards the principal balance. This allows you to pay off debt much quicker. The catch with this option is paying off the balance before the promotional period ends.
If your credit standing isn’t good enough to quality for a no APR and no balance transfer fee credit card, the next best option is to look for a low interest rate. Most low interest rate cards offer a 3% to 4% balance transfer fee. Depending on the amount of money you’re transferring, this fee may balance out, especially if you’re approved for a single digit interest rate.
Before deciding to use a balance transfer, ensure you can afford to pay off the newly transferred balance within the allotted time. Otherwise you’re likely to face a high interest rate, which only leaves you with more debt and another card to pay down.
There are many ways to pay down debt, but it can be hard to know which option is right for you. If you’re looking to pay off high-interest rate debt, a cash advance or a balance transfer may be ideal. Take the time to consider your financial situation and existing interest rates before deciding on one of these options.