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Scholarship Essay submitted at Golden Financial Services
Scholarship Essay

Delinquent Credit Card Debit

Over the years credit card, or plastic money as it is usually referred to in financial circles, has continued to be an accepted mean of payments by both merchants and consumers. The growth in numbers of credit card issuances underlines its importance to the merchants’ consumers and issuing banks. The growth in the number of credit cards issued comes with its fair share of challenges and risks. One of the most notable and problematic risks is the credit risk; risk that the person who has borrowed some money will default in repayments. This risk is further compounded by the fact that most of the credit card lending is usually unsecured and repayment largely depends on the willingness and ability of the borrowers to pay. It is this risk that has led to a big proportion of credit card money to remain unpaid for more than ninety days (Office of the Comptroller of the Currency, 2015).

There is no silver bullet solution to the problem of the credit card that remains outstanding for periods of more than ninety days. This is because the causes of late repayments of the amounts outstanding on the credit cards are many and every outstanding amount can be attributable to more than one cause. This notwithstanding, the solution to the credit card problem can be looked at in two folds. First is by embracing a behavior-based lending and secondly is through tying the loan to the borrower’s cash-flows.

In the behavior based lending, four things are considered key in evaluating any credit card application. First is the personal net worth. Institutions advancing credit cards to individuals should request a copy of an individual’s balance sheet which will show how much assets and liabilities the person has. From the personal balance sheet, the lender will be able to make a decision as to whether the borrower is solvent or insolvent. Second is credit rating of the individual. A person’s credit score can be obtained from a reputable credit rating firm. This score should be incorporated in the analysis of the individual creditworthiness (Office of the Comptroller of the Currency, 2015).

The third item of behavior based lending is the individual’s character. It has been argued that a borrower of bad character even if they have the ability to pay will always find reasons not to pay. An individual character record can be obtained by checking on their past criminal records as well as conducting random call-backs to their referees if these have been provided. Lastly, a background check on the individual credit history is useful in behavior based lending. A person credit history is verified by reviewing the individual’s loan statements if any, or by calling some of their suppliers and creditors (Office of the Comptroller of the Currency, 2015).

When looking at cash-flow based lending, just as in behavior based lending analysis, four things come to the fore in the analysis. First is the analysis of projected income or cash receipts that the borrower anticipates. One way to check this is by reviewing a person’s pay slip if they are employed. This should be a good indicator of how much money the person will be received to enable them to pay outstanding dues. If the borrower is not salaried, a review of any anticipated cash inflows can be ascertained by checking any invoices they have raised or contracts awarded (Office of the Comptroller of the Currency, 2015).

Of equal importance in cash-flow lending is the flexibility of the repayment terms. The frequency of repaying the borrowed amount should not be fixed. It should be allowed to vary based on the borrowers anticipated cash inflows. Multiple installments can be set in those periods when expected incomes are high and fewer payments on those periods when incomes are low. Thirdly is to structure the premium or interest on the advanced amounts to the repayment ability. It is usually anticipated that the person’s earnings are always on an upward trend. As such, the premium placed on the borrowed money can also be tailor-made to follow this structure. In this regard, at the initial periods of repayment, the lender can levy lower interest rates and gradually increase them in subsequent installments. This affords the borrower some cushion of having to pay less at the start and pay more as their incomes stabilize or increase in the future (Office of the Comptroller of the Currency, 2015).

Finally, is the granting of a moratorium to the borrowers based on their cash flows. This has a slight difference from the structuring of premiums in the sense that in moratoriums an individual is not expected to pay anything until the grace period is over. In the case of individual consumers, this allows them to adjust their expenditure structures. For businesses, they get ample time to buy goods, sell them and get paid in time to service the credit card debt (Office of the Comptroller of the Currency, 2015).

It is quite evident that one solution or approach cannot be applied in isolation to solve the problem of credit card default. The behavior-based approach usually helps in assessing the creditworthiness of an individual as well as analyzing how much the individual can pay with minimal strain. Cash-flow approach matches the people’s incomes to their expenses thereby ensuring timelines in repayments. If applied together, these two methods have the ability to ensure minimal defaults of credit card repayments.

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About the student:

Name:  Jaime Salvador Lopez

Home Address:  19408 Gale Meadow Dr. Pflugerville, TX 78660

Home Phone: 512-252-0115


High School Name: Brentwood Christian School, Austin, TX

University Acceptance:  Texas Tech, Lubbock, TX (R11503095)

Accepted Major: Geology

Born in San Salvador, El Salvador (My father was stationed in El Salvador while serving with the US Army).  My Father is from Puerto Rico, and my mother from Nicaragua.

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