To understand this you have to understand what an asset is. An asset is a form of collateral that you have put up essentially as insurance to your creditor, for example this is the house if you are applying for a mortgage.
It is also dependent on what type of debt you have acquired. There are two types of debt, secured and unsecured debt. You won’t even be asked to put an asset up for collateral when you’re applying for a credit card.
A Credit issuer will take a look at your credit history, whether you have a good one or abad one iss depending on the interest rates and the credit limit you will receive.
If you have a rather shaky credit history then you can expect a low limit with high interest rates however, if you have a generally positive credit history you may be eligible for a higher credit limit with lower interest rates.
For this to be understood correctly, the article will explain different types of debt that you can acquire which will fully explain why a credit card is not seen as an asset.
A secure debt is the only type of debt that will require any form of collateral, like I previously mentioned if you are applying for a mortgage the house in question will be the asset, that means if you cannot make the payments you originally agreed too with the bank then they can foreclose on the house in consolidation to you making payments.
Although this doesn’t have to just be about mortgages, if you have requested a loan from a bank and are struggling to make the payments they can essentially acquire any assets to make up for the money owed, that could be your TV or any product of value.
In the case of secured debt the bank has every right to foreclose on any items they deem fit to take.
A secured debt is simply to give the bank security that you will make the payments that you have agreed to in order to receive the loan in the first place, however, the interest rate on a secured debt is significantly lower because, well the bank is secured in receiving their money, as like i mentioned, if you can’t make the payment then the items in question will be used to make up for the money that can’t be paid.
Unsecured Debt is where credit cards fall under. An unsecured debt is money loaned out by someone who has not taken collateral for the money they have loaned.
What that means is the person who requires the loan of money hasn’t put up any security for the bank to receive if payments go amiss. It’s important to know that due to these investments being seen as riskier than investments that are made under security the interest rates may be significantly higher depending on your overall credit history and source of reliable income.
That being said just because a credit card isn’t initially a secured debt can in fact become one if you can not make payments. But before credit card companies can start to acquire your assets they will need to get a court order proving you are not making your agreed upon payments. Ideally a credit card company will try everything in their power to avoid going to court because it can become expensive for both parties.
However, if they take this route, once ruled in their favour your assets will become their assets. If you are struggling to make your payments, your best chance is to get in contact with your creditor and explain why you can’t make your payments, if the debt acquired isn’t a ridiculously big one then some kind of agreement can normally be made to pay back in smaller installments but this will affect your credit score.
An asset is something that you operate to achieve goals, like mentioned a house is an asset for a mortgage loan. The reason a credit card is not a direct asset is because the credit allowance is not your money, so if you were even able to put a credit card up as an asset you wouldn’t take a direct hit from any debt acquired.
There two different types of assets are short term and long term, short term is when a company uses the asset or see’s value within the first year and long term assets are those that can be used for many years, such as computers or equipment used for manufacturing.
A credit card is not an asset because like mentioned in the above article it is not seen as a form of collateral for anyone issuing a loan. An asset is something that you must own, you do not own credit, it is offered to you by credit card issuers but to use it as a form of asset isn’t feasibly possible.
It is always important to understand what type of debt you have acquired such as secured and unsecured, the meaning of both of those forms of debt are above.
A credit card company can only acquire your assets if they have a court order to do so which is a difficult and long process normally avoided by everyone involved as it is very time consuming and expensive.
If you find yourself in a position where you’re struggling to make your payments and worried that the issuer may be getting the court involved it is with in your best interest to contact your issuer and explain to them that it is not your intention to miss payments but unfortunately are struggling to make them at the rate originally agreed, this may raise your interest rate but it will give you time to make the repayments required instead of perhaps losing your car, or any other goods you own that may hold any sort of value to foreclose on.
Read here about if Credit Cards are a Medium of Exchange.