What is a Balance Transfer?
Balance transfers will likely be a popular topic here at MoneyMamba so I figure I might as well start out the trend with a proper page on balance transfers, how they work, and the lingo you need to know.
Speaking simply, a balance transfer is the process of moving a balance (a debt) from one lender to another. Usually, this is done to consolidate monthly payments, achieve a lower APR on balances, or for other purposes, which we’ll explain in detail at a later time.
Make a Balance Transfer
There are a number of ways that a borrower can complete a balance transfer. Some of the most popular are balance transfer checks and online balance transfers.
Balance Transfer Checks – Write out one of these checks just like you would any other check drawn on a checking account. When the payment is completed and approved by the issuing credit card company, the balance is added to your credit account at the stated Annual Percentage Rate and Terms of the particular agreement. The account to be transferred is then credited for the amount of the check.
Online Balance Transfers – A number of companies allow their borrowers to complete a balance transfer online, through their account management backend. You simply accept the transfer offer, enter an account number (credit card number) of an account you wish to transfer the balance as well as a payment address for that particular card. The credit card company will then issue a check and mail it to the transferred company, then add the balance to your account.
Example Balance Transfer
Let’s assume you were to transfer $2,000 from your Discover credit card to your American Express credit card. You would go online, and accept the balance transfer from American Express. Then, you would enter the Discover credit card number on Amex’s balance transfer form, as well as the address for mailing payments.
After the balance transfer form is completed, American Express will send a check to Discover for the amount of the transfer and then add the amount of transfer to your American Express account.
In the example picture above, $1,500 is transferred from a Discover credit card to an American Express credit card. The result is a cost savings of $210 in annual interest on a $1,500 balance transfer from a 19.99% annual rate credit card, to one with a 5.99% annual rate.
So there you have it! Balance transfers don’t have to be hard work…but there’s still more you need to know. We’ll get to the rest—interest-free offers, promotional periods, introductory offers, and how to calculate the effective APR—at a later date. We’re just getting started at MoneyMamba, so we’re starting at personal finance 101, working ourselves up to financial mastery. 😉