I do want to take a moment to mention something that tends to come up in every c

Question

I do want to take a moment to mention something that tends to come up in every class in relation to security instruments. While it's tempting to think so, credit card debt IS NOT secured debt and credit card companies DO NOT have any collateral rights in items purchased with the card. If you purchase a computer with a credit card and then stop paying the debt, the credit card company does not have the right to repossess your computer. They have the right to pursue collection against you, but they do not have any security interest in any collateral. There does exist some variation in which some credit card companies will issue a credit card to someone with poor credit and require either that a certain amount of money be put down, or the card be tied to an account carrying a certain balance. Should a person file bankruptcy, credit card debt is one of the last things that will be paid (although attorney's fees is one of the first...that should tell you who often writes the laws!). Secured debt would be paid first and unsecured debt, such as credit cards, would be paid last. Can we use a security agreement in some way to facilitate a "secured credit card"? If so, how exactly would we need to do this based on what you have learned so far?

Explanation / Answer

First of all the product nature of credit card needs to be understood. The nature of credit card itself is unsecured, it is like a personal loan. That is the reason, interest rate for the late payment on credit cards is high.

In case a security agreement is to be made, there is already a facility in some banks that offer a card on the fixed deposit or a term deposit with a withdrawal limit, this can be used in the same way as a credit card. However, in this case term deposit acts as collateral. In the same manner, a card can be issued against any property or jewellary etc., keeping them as security against which the card can be issued, where in the agreement would state, all terms similar to that of credit card and only with a difference that such credit in case not paid in time or within the time allowed, then the security can be adjusted towards the dues. Untill that time the security would be with the bank in its original nature.

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