Credit Card Advance an Alternative to HELOC?

By:
Kara Johnson - MortgageLoan.com

Getting a home equity loan can be difficult these days. Is getting a cash advance on a credit card a reasonable and simpler alternative when you need money for a home improvement or other major expense?

Simpler, yes. Reasonable – maybe not. Many finanicial advisers will tell you to steer clear of credit card cash advances and convenience checks in all but the most urgent circumstances. But there are a few situations where tapping the plastic might be the sensible thing to do.
 

Easy, but expensive

 
First, let’s talk about simpler. Getting a cash advance on a credit card is pretty easy – you simply let your lender know how much you need and, if it’s within your limit, you get the cash. Even simpler, you can just use one of the seemingly endless supply of convenience checks that arrive with your card statement every month.
 
As for reasonable – let’s face it, the interest rates typically charged on cash advances and convenience checks are stunning – often 18-24 percent annually. Plus, there’s usually a transaction fee of 3-5 percent charged up front when you get the advance. Which makes it a very expensive way to borrow money.
 
By comparison, initial interest rates on a home equity line of credit (HELOC) are running around 5 percent right now, while home equity loans (useful for borrowing larger lump sums) are running around 8-9 percent at a fixed rate. So either is a far more affordable way to borrow than a credit card advance right now.
 

Can't get a home equity loan?

 
Of course, to qualify for either type of home equity loan, you need to have home equity – which many people don’t, due to the steep declines in home values in recent years. So if you can’t qualify for one of those, you might be tempted to go the credit card route.
 
Also, HELOCs and home equity loans can be expensive if you don’t need all the money they provide. Home equity loans often have a $10,000 minimum, meaning you pay closing fees and interest on the entire amount. With a HELOC, you get a line of credit, usually $5,000 or more, which you don’t have to use but may find yourself paying annual fees to maintain if you don’t borrow a certain minimum during the time the line of credit is active – usually five to 10 years.
 
Generally speaking, it’s best to avoid taking out a cash advance on a credit card these days unless you just can’t avoid it. The interest rates and fees are so steep, you’re much better off trying to save up the money over a few months or a couple years instead of borrowing it right now.
 

Credit card options

 
If you do need money immediately, though, there are a few situations in which it might make sense to turn to plastic. The first of these is when the amount needed is relatively modest – a few hundred to a couple thousand dollars, for example. In that case, the high interest rate and fees may not be so much of a burden as to prevent you from paying the whole amount off reasonably quickly.
 
In such an event, it’s probably best to see if you can just put the entire expenditure directly on the card – for example, charging a new furnace and installation after your old one dies in the middle of winter – rather than going the cash advance route. The rates are still high, but at least they tend to be a bit less than a cash advance and your avoid the transaction fees as well.
 

Promotional rate risks and benefits

 
The one situation where it might make good financial sense is if you can get a low “promotional rate” for a limited time. Some credit card lenders still offer promotional rates of zero to 5 percent on cash advances for six months to a year. However, you still need to pay the 3-5 percent transaction fee and the interest rates may reset as high as 14-24 percent once the trial period is over.
 
Promotional rate offers need to be approached with extreme care – they only make sense if you’re absolutely sure you can pay off the entire balance by the end of the promotional period, or within a few months after, when you’ve already whittled down the balance enough so that you’re only paying 14-24 percent interest on a small amount.
 
But you need to be careful, or those high interest rates can turn into a debt trap once the trial period has ended. And don’t count on being able to transfer the remaining balance to a new promotional rate once the trial period has ended – credit markets are still in a state of upheaval and you don’t know what might be available in six months or a year.
 
Again, it’s generally best to avoid using credit cards for major debts whenever possible. But in some circumstances, it can be done successfully – but with you need to be very careful about how you do it to avoid getting burned by those high rates.

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