What is a credit debt obligation?


When you sign up for a credit card, you'll likely need to sign a collateralised debt obligation to ensure you pay off your credit balance. If you need clarification about a credit card obligation and what happens if you can't pay, you've come to the right place. This article will cover everything you need to know about obligations and what this means for your loans and debt management. 

Let’s get to the following commonly asked questions: 

  • What is a CDO in simple terms?
  • What is an example of debt obligation?
  • What is the difference between CDS and CDO?
  • What is the difference between a CDO and a CLO?
  • What are collateralised bond obligations?
  • What are collateralised mortgage obligations?
  • What is senior debt?
  • What happens if I don’t meet my credit card obligation?
  • What happens if you reach your credit limit?

Q1. What is a CDO in simple terms?

A collateralised debt obligation (CDO) is a legal agreement undertaken by a borrower that guarantees the payment of a loan. For example, a credit card agreement is an example of a credit obligation. 

If you’re looking for debt relief and have a high credit card balance, you’re legally obligated to pay off your credit card debt. However, you might not be responsible for paying off the debt if: 

  • It's been over six years since you paid or contacted the card issuer. 
  • There was an issue with the credit obligation, or the agreement needed clarification. 
  • Credit card companies should have checked your ability to pay off the line of credit before you signed the contract. 

Note: If it's physically impossible to pay off debt, consider debt settlement or taking out personal loans to pay the outstanding balance and avoid bad credit.

Q2. What is an example of debt obligation?

A debt obligation is when you owe money to a bank or a creditor. With careful financial planning, having a debt obligation is fine. Nearly all Australians have some form of debt. 

Commercial real estate loans are a common form of credit debt issued by commercial banking institutions, which may use credit enhancement techniques to reduce the credit risk associated with these loans. Such techniques may include requiring additional collateral or obtaining insurance policies to cover potential losses in the event of default.

However, if you have multiple credit card accounts and can't afford to pay them off, you could be in a financial crisis. Having a good grasp on risk management is essential as it can significantly impact your finances.

Here are some examples of debt obligations: 

  • Real estate mortgage loans.
  • Credit card.
  • Personal loans.
  • Car loans.
  • Student loans.
  • Bank loans.

Q3. What is the difference between CDS and CDO?

While a credit obligation is a legal agreement between a borrower and a creditor, a credit default swap (CDS) is a financial derivative that allows financial institutions to swap their credit risk with another investor. The swap occurs when a lender purchases a CDS from an investor who then agrees to reimburse the lender if the borrower cannot repay the loan. 

Q4. What is the difference between a CDO and a CLO?

A CDO, or a collateral debt obligation, is a legal agreement undertaken by a borrower when taking out credit in case their loans default. Comparatively, a collateralised loan obligation (CLO) is a portfolio of leveraged loans securitised and managed as a fund. 

Collateralised loan obligations (CLO) issue what's known as "debt tranches" alongside "equity tranches". They then use the money from the issuance to take out a pool of bank loans. The overall aim of CLOs is to take loans made to private equity borrowers, securitise them, and redistribute them to institutional investors. 

Q5. What are collateralised bond obligations?

A collateralised bond obligation (CBO) is a structured investment product created by investment banks that uses a pool of assets, which may include mortgage-backed securities, asset-backed securities, and other types of high-risk securities, to create investment-grade security. A CBO allows fund managers and other investors to achieve better diversification in their portfolios, potentially reducing overall risk. 

However, it’s important to note that during the subprime mortgage crisis, many CBOs were backed by subprime mortgages, which caused significant losses for investors and contributed to the broader financial crisis. As a result, many investors became wary of these types of complex investment products.

Q6. What are collateralised mortgage obligations?

A collateralised mortgage obligation (CMO) is a pool of mortgage loans with a similar credit score or the same loan amount and resold as a singular investment called a security. Investors then earn an income from the mortgage bonds through payments made on the mortgages.

Q7. What is senior debt?

Senior debt refers to debt that has priority over other forms of debt in the event of default. Organisations such as life insurance companies, hedge funds and pension funds may invest in senior debt instruments to fulfil their debt obligation to their policyholders or members.

Q8. What happens if I don’t meet my credit card obligation?

Find yourself in a financial and economic crisis and need help to meet the minimum payments on your loan. Creditors will begin contacting you regarding the missed payments and set new deadlines to repay your credit card. If you still don't make any payments, your account will default, and the credit issuer will begin taking legal steps to get the money back. 

Important: Remember, if you signed a CDO, you're legally required to pay back your debts. If you don't pay, you'll likely face a debt collector who will try to take back the money from the unsecured debt.

Q9. What happens if you reach your credit limit?

If you reach your credit limit, any credit card payment you make will likely be declined, and if you exceed your limit, you will be charged high-interest fees. Using nearly all your limits will also lead to a high credit utilisation ratio, which will be reflected negatively in your credit reports.

If you're struggling with debt management and personal finance, consider taking out a debt consolidation loan to make your debt repayments more manageable. For more information, it's worth considering consulting with a financial advisor or asset manager to ensure proper credit risk management.

Summing up 

If you’re struggling with managing your finances and meeting the obligations of your credit card agreement, don’t panic. 

You can practice credit repair and keep on top of your loans in various ways. WeMoney, specialises in loans designed to manage debts, such as, such as personal loans, balance transfer credit cards, and debt consolidation

For more money advice, stay up-to-date with our blog. Alternatively, you might be interested in our article ‘how to make a budget’.

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.

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