How To Buy Credit Card Debt
Most Americans use credit cards, and, as an investor, you may wonder how to buy credit card debt. To buy credit card debt you must either start your own collection agency to buy debt directly or buy credit card debt indirectly in the form of bonds or collateralized debt obligations (CDO’s). In either case, collecting on credit card debt is a long and involved process, requiring time and resources. As such, the return for successfully collected or paid credit card debt is high.
- Invest in junk bonds issued by credit card companies. Credit card companies often issue much of their defaulted or late credit card debt in the form of junk bonds to be bought by investors. These bonds can be purchased through a bond broker; the price and rate of return on the bond is determined by the amount of successful collections of the credit card debts that underlie the bond. Do adequate research into the bonds to make sure you know what credit card debt is included in the bond purchase.
- Purchase collateralized debt obligations from a credit card company. These collateralized debt obligations, or CDO’s, are made up of many types of credit card debt – some current, some late, and some defaulted. Highly rated tranches are typically made up of currently performing debt, while low rated tranches are composed of defaulted debt. Determine what type of credit card debt you want to purchase and buy into the appropriate tranche of the CDO.
- Start a collection agency. Starting a collection agency will allow you to buy credit card debt directly from credit card companies or other collection agencies. Once bought, it will be your responsibility to resell the debt or attempt to collect on it.
- Review the Fair Credit Reporting Act and the Fair Debt Collection Practices Act. Before starting your collections company, it is imperative you understand the laws which regulate the industry. Read, review, and become intimately familiar with these laws to avoid fees, fines, or even jail time.
- Incorporate as a collections agency. Incorporate your company and begin looking for credit card debt to purchase. Credit card debt can be bought from credit card companies, banks, and other collection agencies. Like many other types of businesses, buying credit card debt will require you to make a sales pitch to these organizations. Typically, defaulted credit card debt can be bought from five to ten cents on the dollar (reflecting the difficulty in collecting this debt).
- Register for business accounts with the three main credit reporting agencies. As a credit card debt collector, the ability to report delinquent debt and repayments to Transunion, Equifax, and Experian will enhance your ability to buy credit card debt. You will also increase your leverage of the debtors you attempt to collect from.
- Attempt to collect on the debt you have purchased. If you buy credit card debt, you will only make money if you collect on the debt you have purchased. Following the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, collect on the debt you have purchased.
Learning how to buy credit card debt can be difficult, but becomes significantly easier with a little experience. Credit card debt has the potential to provide a very high return on investment; however, the likelihood of continued default and the inability to collect on the debt make it a very risky purchase.
Resource: Fair Credit Reporting Act