Subprime Credit Card

  

Categories: Credit, Banking

See: Subprime. See: Credit Card.

If you're a bank giving the right to a candidate with virtually no bank account cash, a minimum wage job, and no history of paying bills on time, wouldn't you be nervous about giving them a piece of plastic with a mag stripe on it that lets them buy virtually anything? Well, of course you would. So you'd limit them severely as to how much they can spend before having to pay their billls. Like...think: $1,000 limit. That way, if they go totally Greece on you ("I can't pay my bills!") then you have lost a grand. You're not dead; you'll live to loan another day.

And to make up for the highly likely case that, say, 1 in 10 will default or cause problems, you'll charge them over 20% rates on their credit cards when they do borrow money from you, i.e. when they don't pay off their balance each month.

That's the bad news. The good: many prime borrowers started out as subprime. They paid their bills dutifully on their cards month after month, and established credit and trust, and ended up just fine down the line.

The ultimate: the Black Amex Card. Try not to leave home without it.

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Finance: What is Collateralized Mortgage...65 Views

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Finance a la shmoop what is a collateralized mortgage obligation or

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CMO all right people well this is a GMO and this is a CMO yeah it's a bunch of

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mortgages in one investment vehicle pot like mortgage Stone Soup not nearly as [Mortgage stones in a bowl of soup]

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exciting is that that man-eating plant over there

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so yeah just a bunch of mortgages that are packaged together when banks and

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investors package mortgages together well they can treat them like they're a

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big fat indexed bond fund because these groups of mortgages while they pay

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interest ie the interest comes from the people who are actually paying off their

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mortgages so why would you collateralize a mortgage obligation anyway answer risk

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by packaging lots and lots of mortgages together the theory was that well as a [CMO boxes on a conveyor belt]

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whole they would create a much less volatile environment than the former

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alternative of having tens of thousands of individual mortgages many of which at

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any given time were you know in do rest as people were dead beating and not [Man playing video games]

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paying what they promised to pay back right well collateralizing this group

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bought and sold as if it were in ETF or individual closed end fund but Wall

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Street being Wall Street where greed is good until it's not abused the notion of [Boxing gloves punch collateralized]

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collateralized mortgages and actually applied the notion of collateral against

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them pledging as collateral the equity in these mortgages or packages of

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mortgages and then borrowing against them so it's like leverage on leverage,

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highly volatile and this is sort of like the brilliant idea of the fraternity [Man walking along]

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chocolate when he sees his you know couch is on fire yeah like why wouldn't [People carrying snacks and a couch on fire appears]

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he just put it out like what was he imbibing there all right well in fact

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