Sound good? Hang on, this requires some explanation. It has to do with a term called cross-collateralization. Anyone who has borrowed money to buy a house or car knows the term "collateral." In the financial world, collateral is security pledged against a loan. Simply put, the lender really owns your house or car until you pay it off.
Don't believe that? Stop making payments and watch what happens. Even if your have nearly paid the account in full, you lose your collateral - your home or car - if you don't make all the payments.
For mortgage and car loans, banks require those assets to be offered as collateral, and may ask you to pledge them for other loans not related to those assets. For example, if you need money to start a business, the lending bank may ask you to offer your home, car or some of your investments as collateral. That way, the bank won't be the loser if you default. You will.
Cross-Collateralization
Sometimes banks will allow the borrower to offer the same collateral for more than one loan. If you have a house worth $250,000 and owe $100,000 on your mortgage, the bank will accept the $150,000 of equity as security for another loan. This is called cross-collateralization.
Banks routinely use cross-collateralization of loans to reduce risk. You can bet when the risk is less for the bank, it's greater for the borrower. But there is a new twist on this that actually can benefit consumers who have big credit card debts they cannot pay.
It is commonplace for consumers to have credit card accounts with the same institutions that hold or service their mortgages. Because of the rapidly growing amount of bad mortgage debt, some banks - including some of the nation's largest - have decided receiving mortgage payments is more important to them than receiving credit card payments from the same borrowers. Why would that be?
Why Banks Are Hurting
The real estate boom of the past decade was so profitable for so long for so many people, some thought it would go on indefinitely. Banks accepted more risk from less qualified buyers. If borrowers might have been a little shaky, bankers figured they could always reposes the home and sell it, hopefully for a profit.
Then the bubble burst in 2008. Home values plummeted so much that many borrowers owed more money on their homes than the homes were worth. It does no good to foreclose on a home, then turn around and sell it for a loss, if it can be sold at all. What's a banker to do? The bank would rather keep the home mortgage payments coming in and not put those assets in harm's way.
Borrowers have similar dilemmas: many have variable-rate mortgages that cause their monthly payments to increase as mortgage interest rates go up. To make matters worse, many also have thousands of dollars of credit card debt on cards issued by the same institutions.
Bank's Pain, Your Gain
If your situation is anything like that, take heart. You may have more leverage than you realize. The more important it becomes for banks to keep you making your mortgage payments, the more likely they are to strike a deal on your credit card debt.
The situation for the bank is like that of a man whose foot is stuck in a railroad track with a train speeding toward him. If he stays between the rails the train will obliterate him; if he stretches as far as he can to get mostly off the track, he may lose a leg. The banker may be willing to loose a leg (your credit card debt) and live to loan another day: Better for the bank to take a smaller loss on the credit card balance than to take the big hit on the mortgage.
Get Professional Help
It can be daunting trying to negotiate your way out of such a situation. If you don't go about it right you may dig a deeper hole for yourself. The best course of action is to consult professionals who do this kind of work every day.
Debt settlement companies can help you develop a solid plan to get out of debt and enjoy life again. These companies don't all work the same, however. Ones that are members of the Association of Settlement Companies, TASC, can almost always be trusted to adhere to accepted industry standards. With your personal commitment to the task and professional help, you can get out of debt.
You might have gotten your first credit card offer when you were still in college. It was exciting the idea that you could be entrusted with a credit card account. You could suddenly buy things you never dreamed possible. Your standard of living seemed to grow considerably. This was especially important during your college years, when money was so tight.
You may have run up your credit card balances when you had your first child. You had to buy so many things a bassinet, crib, stroller and a credit card seemed a good way to pay for it. You might have realized that it was wrong to overcharge, but you felt as if you had no other option. Suddenly, you found yourself facing a mountain of credit card debt.
Millions of us use credit cards each day to pay for both major ticket items and minor goods. Credit cards are a multi-billion dollar industry, and the industry seems to be growing all the time. Yet, there can be a tremendous amount of stress associated with paying with plastic. This stress can also be difficult to alleviate, since credit card use can be so addictive.
There can be the stress involved in paying off your monthly balances. The balances might grow so great, in fact, that you may have trouble paying them off entirely. There can be the stress involved in trying to manage multiple credit cards. Also, you might find yourself stressed out by even minimum monthly payments. If you have to balance other major bills, such as a mortgage and car payments, the financial stress can seem overwhelming.
How do you deal with such stress? There are a number of strategies you can use. To begin with, you can try cutting up your credit cards. This will eliminate the temptation to overspend altogether. When your balances are no longer rising, you might find it easier to deal with credit card debt.
However, you may view credit cards as a natural part of life. Therefore, you might not want to eliminate them from your wallet. In such a case, you must learn to somehow deal with credit card debt. There are a couple of different ways to do this.
For instance, you might call the credit card company and try to re-negotiate your interest rate. This may require you to talk with a supervisor, but it can be well worth the effort. Cutting your interest rate can significantly lower your payments.
Another technique you can use is to put yourself on a credit card budget. Figure out, realistically, how much credit card debt you can handle each month. Once you figure out your limit, do not go over it under any circumstances. Otherwise, you could find yourself paying significant monthly payments.
Also, try, if at all possible, to pay your credit card bills on time. This means eliminating late fees, which can prove to be a significant expense. By paying your bills on time, you will improve your credit rating and you'll find yourself dealing with less stress.
In some cases, the best way to deal with credit card stress is to discuss your problems with a credit counselor. He or she may be able to work out a more manageable payment plan for you.
With the counselor's help, you should also learn techniques for better managing your money. Best of all, such counseling is free, so it will not cause you additional financial stress. You may find yourself to be tremendously relieved after talking with a credit counselor about your problems.
You should not be embarrassed by the fact that you are undergoing major credit card stress. It can literally happen to anyone, particularly since credit cards are so widely available. The important thing to remember is that credit card stress, while difficult, is completely manageable.
By invoking proven money management strategies, you can learn to deal effectively with your stress.You may even find that using credit cards becomes an enjoyable experience, since you are doing it so rarely. Also, be sure to talk with members of your family about the stress you are undergoing. They may be able to help ease your stress level and they may curb their own spending habits as a result.
Both Zack Anderson & are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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