A credit card is issued by an issuer (ie. Bank) to a holder, who can use the card to pay for any goods and services being offered by a merchant. The issuer pays the merchant base on the cardholder’s promise to pay the issuer of the price paid plus other fees and charges that have been agreed on.
Credit Card is one of the breakthrough that the financial world has created to simplify, and in other ways, complicate an individual’s way of living. Credit card debt can be created via two approaches. The first approach would be by purchasing goods and services using the bdo credit card.
This way of purchasing can be done by visiting a shop who is accredited in that mode of payment. With the advances we have in technology and the rise of internet convenience, credit cards can now also be used to purchase the same goods and services found in traditional shops through an online facility. Without being mindful of the purchases, credit card debt can slowly accumulate and burden us with its payment.
The second approach one can accumulate a credit card debt is a loan through a cash advance facility that most credit card companies provide. This type of approach usually yields a much higher interest than the first approach. Most often, the card has a separate limit as well for the cash advance feature.
Credit Card debts are not bad and can be beneficial in building one’s credit as long as the cardholder maintains a level of debt that they can payoff. Unfortunately, there are cardholders who lose track of the debt they accumulate hence paying off the debt becomes a burden. Adding the interest rates that a credit card company requires to be paid in addition to the credit used, the total fees may balloon to a significant amount which the cardholder may find hard payback.
Knowing proper credit management by monitoring borrowing and spending should be able to help the cardholder maintain a reasonable amount debt. This in turn may work for the cardholder’s advantage by raising their credit standing.
Lending money to someone with just a few bucks makes you feel like a sucker when that person doesn’t pay you back.
For lenders who do business by granting loans to individual, incurring a loss would definitely hurt their pocket as much as it does on their ego. That is why every lender has their approach on granting an individual a personal loan singapore or small enterprise a business loan. There are risk management techniques that each lending organization or financial institution applies when they review a borrower’s credentials. These lenders may manage risk through a number of ways but they definitely look at the same requirements.
A creditor or lender will always check the borrowers credit score. These gives the creditor an idea of how disciplined the borrower is when it comes to managing their debt. How often do they default, if they do and if debtor has a history of credit being written off. Credit score help the lender evaluate a borrower on their past behavior in managing their debt.
Lenders check and verify the source of income a borrower may have and how steady the income is. This is a factor that allows the lender to know if the borrower has enough resources to pay off their expenses. With the added loan, the lender wants to know if the borrower would be able to sustain the monthly payments despite of the existing expenses and additional charges brought about by the payday loan.
Some lenders look for in a borrower an asset that can be secured as a collateral. The reason for a security is for the lender to ensure that they will be able to recover any loss that they may incur in case of any form of default.
Guarantor or Cosigner
Some lenders extend risk management to include a guarantor or cosigner to ensure full recovery of the loss that may be incurred. A collateral can only liquidate the cost up to the value of the asset that has been secured. Unlike a collateral, having a guarantor or cosigner will give a higher probability for the lender to recover the cost of low income loan in case of borrower’s default.
This review ensures the lender the risk on the capacity of a borrower to pay. With careful planning and thorough credit risk management review, this allows a financial institution or lender to grant personal loans to individuals, businesses and corporations who have the capacity to pay.
As the name suggests, this is a review of the risk of credit being paid.
There are four essential ways to manage credit risk:
Avoiding Risk – is a way of risk management where a lender denies an applicant to be granted with a loan. This is usually applied to a person who has high credit risk like borrowers who have already defaulted in payments of their previous loan. It is essential that a good credit risk management team evaluate these people who may bring lost sales.
Controlling Risk – this is a form of risk management where a set of controls or rules are established to allow reduction of high risk borrowers get approved with a loan. Controlling risk is the most common risk management that a financial institution may apply when granting a loan to a borrower.
Accepting Risk – This is an open type of risk that may be applied by a lender especially if the lender is aggressive in increasing its clients. Accepting risk is open to high risk borrowers which has a high probability of defaulting payment. When a lender applies this type of risk, it is possible that the lender may apply collateral and high interest rates on the approved loan.
Transferring Risk – This form of risk pushes the risk of default to a third party such as a guarantor. When the borrower makes a default payment in the loan, the guarantor becomes liable for shouldering the loan. In these cases, a guarantor is usually a person who knows the borrower and is willing to shoulder the risk of paying in case of default by the borrower.
The risk management type that a lender may use depends on the goal they have when it comes to building their clients. A controlling risk type of management may be used by a lender with a goal of gaining low risk clients despite being few. Accepting risk on the other hand may be a way of lenders to gain volume of clients rather than quality.
Loans come in many forms and it can be advantageous to a borrower. But when a loan slowly turns into debt that becomes outrageously hard to manage, it can be something that can bring down an individual’s lifestyle or even a business. Being deep in debt can even bring down a corporation or an empire that has been running for the longest time. A few points will be discussed how a debt can turn into a dreadful position to be in.
Taking Loans or Charging Credit Beyond Your Capacity
One action a borrower must take before taking on a loan is doing a financial check. You will need to identify and make yourself aware that loans being taken should be within your capacity to pay. Always remember that a loan will need to incorporate interest rates and other fees as part of the amount that comes due. Ensure that the amount is within your capacity to pay.
Acquiring Loans with Overlapping Term Period
There are instances where a borrower decides to take on two or three different loans for different reasons and different needs. A borrower must be aware that overlapping terms may cause to take away a big slice of the monthly income. Avoid taking overlapping terms. In some cases, a lender would be doing a credit check based on the total income but will fail to consider the expenses that come every payday. Ensuring that your previous loan has been fully paid before getting a new one allows better management of your debt and higher possibility of going in default.
Owning a Credit Card with a Big Credit Limit
Credit cards are one of those financial tools that bring convenience to our spending lives. But it comes with great responsibility to ensure that any charges being made should be something you can pay with cash. Having enough savings to cover your entire credit limit (along with a few months of your monthly expenses) should be an ideal set up. It allows you to be at peace knowing that if you maximized your credit, then you can always liquidate the debt without worry.
Planning is the key to avoiding being deep in debt. Keep in mind that debts are good as long as we are able to manage them from growing.
Loans and Credit, by nature, are exposed to risk. There are cases where lenders incur losses for loans or credit lines where a debtor fails to delivery payment. Most cases, these are debts which are high in value. To be certain that a lender is paid by a borrower’s default or even insolvency, a credit insurance can protect the lender. Credit Insurance does not only cover lenders but also covers other companies who want to insure their accounts receivable.
So how does a credit insurance work?
Credit Insurance protects a lender or a company from its customer’s default to pay their debts. The debts may arise from borrower’s increasing expenses causing lack of funds or even insolvency. These cases where a borrower is no longer able to pay the debt acquired from a loan, the credit insurance will protect the lender by getting the loan amount back from the insurance company with a fee.
Credit insurance companies monitor a lender’s financial status of the borrower. The credit insurance company constantly monitors the risk that is involved with a borrower of paying the debt. Based on the risk review made by the credit insurance company, the lender gets a certain credit limit to which they can claim against in case the borrower becomes unable to pay or even insolvent. The limit granted may change based on the review of credit risk of the borrower.
The purpose of getting a credit insurance may bring the following advantages for a lender:
It allows the lender to receive claims for a from a debtor’s insolvency or inability to pay. There may be losses but this will minimize the possible losses that a lender may take from a debtor’s default.
Improves lender and borrower relationship since lender has a peace of mind and there is no need for the lender to constantly remind the borrower of the amount due.
Credit Insurance may prove to be complicated and a thorough plan and review must be made before taking one. This means of protecting the amount borrowed is a very effective way to protect the lender from losses when unable to collect.