What is Cross-Collateralization of Debt?


credit card advice

Susan Ladika
By: Susan Ladika
Posted: June 26, 2015
Our personal finance experts dish out the most trusted credit card advice on the web, including juicy tips, tricks and secrets from inside the credit card industry.

If you’re strapped for cash, you’ll probably want to continue paying your mortgage or rent to keep a roof over your head and still make your car payment to keep wheels in your driveway so you can get to work.

Skipping your credit card payments might seem to make sense. However, not only will that hurt your credit report, drive up your interest rates on your credit card and pile on the late fees, you could also lose that car you need to get to work. What will you do without a paycheck?

It’s a practice called cross-collateralization of debt, and it’s particularly common among credit unions.

The car you finance through your credit union doesn’t just serve as collateral for your auto loan. It also serves as collateral for your credit cards issued by your credit union. So if you don’t pay your credit card bill or personal loan, your credit union can repossess your vehicle.

Yet there are ways to protect yourself before you run into trouble.

Read the fine print of your contracts

It’s easy to get overwhelmed by volumes of paperwork – let alone all the details – when you’re taking out an auto loan.

If you feel like you can’t wade through all the information, specifically ask your credit union representative if the loan document has a cross-collateralization clause.

If it does, ask if the clause can be deleted from the loan agreement. It never hurts to ask, so why not take a chance?

Shop for a credit card outside your credit union

Just because your credit union offers you a credit card, it doesn’t mean you have to accept it.

If you have a decent credit score, there are a plethora of places where you can look for a new credit card. You’re probably already getting offers in the mail as credit card issuers again try to lure in new customers.

Shop around for an auto loan

While it may seem easiest to take care of all your financial affairs at one location, the best way to protect yourself may be spreading your business around and avoid having an auto loan and credit card from the same credit union.

Be sure to check other places for auto loans — there are plenty of great lenders out there.

Photo source: mcdfs.com.