According to the Washington Post, credit card charge-off rates reached a new high in August 2009. Banking regulations dictate that lenders charge off balances that remain unpaid for six months. Some banks seek to sell their interest in these defaulted loans to outside investors at a discount in the form of credit card backed notes. If they know what they are doing, investors can attempt to profit by buying these notes.
- It is imperative for aspiring credit card note investors to conduct extensive due diligence in order to ensure the legitimacy and veracity of the accounts considered for purchase. Individual investors will most often be purchasing these notes from a reseller as opposed to directly from the lending bank. Consequently, it is critical to research the reputation of the company that wants to sell you the notes. Fraud occurs within this arena, with unscrupulous note sellers fabricating data and passing it off as legitimate debt. Insist upon references from the seller, and contact parties who have done business with them in the past. Ascertain that requisite data including each debtor's name, address, Social Security number, balance owed and underlying proof of charges is available before even initiating price negotiations.
- The level of discount possible on credit card notes relates to several factors. The most important pricing component is the age of the debt. Older credit card debt is priced at a much deeper discount as opposed to credit card notes backed with debt which was recently charged off. The geography of the accounts is also a critical facet of analysis. Accounts located in states that allow wage garnishment, the seizure of bank accounts and property liens have more value than accounts located in debtor-friendly jurisdictions. Purchasers of credit card notes should also review the nature of the original lender. Credit card issuers that cater to customers with bad credit produce charged off accounts that have less value than those that emanate from prime credit lenders.
- A detailed contract is necessary to consummate the sale of credit card backed notes. This contract must contain all the applicable terms including price, representations, warranties and indemnification. The indemnification is especially important because it insulates you from any liability that may arise due to the actions or omissions of the seller. If a seller refuses to include this indemnification within the contract, then you are well advised to pass on the deal. Novice credit card note purchasers are well served to seek qualified counsel to ensure that the proposed contract adequately protects them.
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