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Economics/credit card balance transfers and the credit system


QUESTION: What is the economic procedure that banks use when a customer transfers the balance from one credit card to another?  Does one bank actually send a check like we would out of its assets, or is the debt just transfered as when mortgages are moved from one company to another?

How can credit card issuers offer low or zero interest rates on these transfers if real money is paying off the balance?

Does the credit card system work like the mortgage and loan system, where debt creates money out of thin air?

ANSWER: Well, the exact mechanics of both options you present are actually the same.  The customer initiates a transfer, at which point the new lender uses the new debt that the customer is incurring to pay off the debt held by the other lender.  The money is sent from one bank to another by interbank electronic funds transfer.

Hopefully that helps!

---------- FOLLOW-UP ----------

QUESTION: Thanks for the quick reply!

Just to clarify:  If card A has a $4000 balance and I pay it off with a balance transfer to card B, the new debt on card B creates $4000 for bank B, which it then uses to pay off card A?  It uses the newly created funds from debt as opposed to money it already has?

Let's say you have $4,000 in debt in with Bank A.  You want to transfer that debt to Bank B, or maybe Bank B wants to buy debt from Bank A as an investment, which is also quite common.  In any case, Bank B gives money to Bank A for the total $4,000.  Your debt with Bank A is now paid-off.  Bank B has $4,000 less now, however, because they paid your debt with Bank A.  So, now you owe Bank B $4,000 for the debt they paid at Bank A.


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Michael Taillard


Accepts most economic questions


Economic Consulting: American Red Cross; US Strategic Command -- Economics Lecturing: Bellevue University (Bellevue, NE) Huijia College (Beijing), OPII Schools (Omaha), Madonna University (Livonia), Schoolcraft College (Livonia), ZomBCon (Seattle), Zombiefest (Lincoln) -- Media Appearances: Dead Man Working (2012 Movie documentary), The Heartland News (Omaha local news outlet)

American Economics Association, Business Networks International, Midwest Writer's Guild, Zombie Research Society

Economics and Modern Warfare: The Invisible Fist of the Market (Palgrave Macmillan) -- 101 Things Everyone Should Know about Global Economics (Adams Media) -- Corporate Finance for Dummies (Wiley) -- Psychology and Modern Warfare (Palgrave Macmillan) -- Analytics and Modern Warfare (Palgrave Macmillan)

PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

Awards and Honors
Philanthropy awards and nominations for the OPII Schools economic experiment

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