by Tricia
With Congress putting more pressure on credit card companies, I haven’t really read anything about the credit limits that the credit card companies give borrowers.
A while ago, I shared that my credit cards gave me some more rope. I decided to not stop there, and try for more credit with simple clicks online. I went through all of our cards, and I don’t know whether to nervously laugh or cry at our total credit available.
$71,000!!
As a reminder, we made $48,000 last year!
If we were to max out our credit cards again, here are some interesting numbers (based on 12% interest and paying 2.5% as the minimum payment):
Minimum Monthly Payment: $1,775
Time Taken to Pay off With Paying the Minimum: 32.9 Years
Total Paid in Interest: $47,180
Finance Charges per Month: ~ $700 to start
Would a bank give me that high of an unsecured loan? No. Why are the credit card companies? Anyone else out there have ridiculously high credit limits compared to their income?
To answer your question, I think you should compare your income with the credit limit of EACH card instead of the combined. When deciding your credit limit, the credit card company looked at your income, not your combined credit limits on all your card. One can have dozens of cards, but only have a couple of thousands on each of them, which is proportional to his income. So comparing your income level with total credit limit doesn’t make too much sense to me. What’s your highest credit limit then?
My highest credit limit on a single card is $29,000. The next highest is $20,000.
You may be living proof, but it’s not that there is something wrong with the credit card industry. The ‘something wrong’ is people like you who borrow out of control. It’s not the credit card companies that are at fault. Granted, they make it easier for one to borrow and borrow and borrow, throw in questionable clauses, etc. but ultimately the problem lays with the person swiping the card. Each person must control their behavior and use it wisely. I believe in CAVEAT EMPTOR. All people must read the wishy-washy small print. We can’t blame the credit card companies – we all know that using credit is risky, yet we decided to swipe away. “The borrower is slave to the lender” as the Bible states. I can’t agree more! America’s debt problem is in the people that make up America. We are a WANT IT NOW society, and until that mentality changes, we’ll always have a debt problem, either individually or societally.
Tyler – I don’t argue that I’ve made poor spending choices in the past and we lived above our means. But something just doesn’t sit well with me with the fact I have so much money available to me from our credit cards, yet if I went to a bank they wouldn’t give me that much money unsecured.
I wholeheartedly agree with your statement about our society being a WANT IT NOW society. What can we do to change that?
Good discussion thus far…
I haven’t made more than $25,000/year the last several years, but I have one credit card with a $35,000 limit, one with a $24,000 limit, two that are about $12,000 each, and three that are about $6,000 each. That’s $101,000 off the top of my head and doesn’t include my small business credit cards or my department store cards, which would probably add another 15-20 grand if I bothered to add it all up.
I have too much credit card debt, but I’m nowhere even near those limits. Still, it’s crazy that I have those limits.
Tricia, I understand your thinking and agree with you completely on the response. It doesn’t sit well with me either that banks wouldn’t offer that much unsecured but CC comp do. But if you are not going to use those high credit limits, why do you keep them? It is a debt-trap waiting to happen. I can just see the person who has a $50,000 medical bill with no health ins. just throw that balance on these cards! I am 24 and I have never owned a credit card in my life! I own a house and go to school full time while I work full time (I pay cash for school). I don’t have any loans other than my wife’s student loan, which will be gone by Dec. All this without the use of a credit card. If I can do it, ANYONE can! How can we change the WANT IT NOW mentality? I don’t think we can CHANGE it per se, but my advice is to live below your means. So simple yet so hard for everyone to do. If our grandparents could do it, why can’t we?!?
if you requested CC limit increases at the same time, several things probably happened that allowed that high of credit limit.
First, you had good credit and a good credit history with the company.
second, the CC may not have requested a credit history check to approve you (mine recently increased mine from $4500 to $30k without a credit check).
third, the CC may not have requested a credit history check from the same credit bureau as other CC you requested.
aside from that, are people always honest in reporting income when applying for CC or credit increases?
if you haven’t had to have a CC good for you; however, there are many people in the real world that a CC makes sense and is needed. I work, travel and live abroad. CC is necessary.
i also agree that debt comes down to personal responsibility. i’m not in agreement, though, about having high credit limit is an accident waiting to happen. if you cannot handle it, then you shouldn’t be getting it.
it’s not unimaginable that CC companies will give high limits; because, that is what CC companies like, is someone who will charge more than they can afford to make minimum payments over several years. that’s how they make profits. now they have all their actuaries figuring these numbers out. bottom line, they know that they can more than make up the difference in principle with fees and interest, and two, they can charge off the principle and sell the debt.
Congress isn’t putting pressure on CC companies. The little posturing demonstration is exactly that, posturing. It is intended to show that Congress cares, and allows CC companies to show that things are being reviewed. By congress looking at the issues, CC companies get a freebie once Congress doesn’t move on the issue.
Let’s also not think that banks and credit card companies are different. they are not. Credit cards are bank products. they are the biggest profit maker for banks.
I’m sure there are more ways to change the “I want it now” mentality but some that I can think of are:
1. Parents start at home teaching their children young. Do you really need Nike hightops for an 18 month old?
2. Consumer education classes in high school and college. Sure it is in the CC holder’s hand when it comes to accountability but first they must learn how.
3. Don’t allow CC companies on college campuses unless it is a pay it off monthly card. I was much better off when I had just a regular American express account and I had to keep track of my spending to know how much money to keep out of my work-study check to pay for my daily essentials. Once I got hold of a minimum payment card…well the rest a lot of us know about.
4. A national campaign against debt and the values of saving.
5. The government could pay down their current debt. What happened to promoting savings bonds the citizens could purchase? I mean wouldn’t that help some to get away from debt to foreign countries and remind us to save?
6. Could a group of economists figure out how to keep our economy going without the consumerism? Our economy is so entrenched in this and look at how it is influencing China and India. Soon our problem will be the world’s problem.
7. Study the Depression Era. Will we be in so much debt someday that this sad time will repeat itself? We seem to think we could never again as a country be so unfortunate.
Anything else? Will we ever change? I think we can.
I think it’s a good thing they give you that rope as long as you know how to use it. It allows you to still maintain a decent credit score despite having a fair amount of debt. That in turn helps you get a good rate on your Prosper loan, saving you money.
I guess credit card companies found they can make money by giving outrageous limits. For whatever reason banks don’t agree or else they’d do the same. I’m not really sure why that is. I’m sure there’s some legislation that applies to bank loans that doesn’t apply to credit cards.
lazy man, i think it has to do with the Uniform Small Loan Law (USLL) that governed the limits of interest banks could charge on loans.
the reason CC can charge more interest is because of the definitional difference between credit and loan.
There IS something wrong with credit card companies. It’s not the outrageous limits that concern me, but the interest rates and how they are adjusted. For example, I use my credit very responsibly and had rates under 15%. I typically would carry a large balance. When I decided several years ago to go credit-free (having cards but paying them off in full every month) I started rapidly paying down all my credit cards. As soon as I started making huge payments every month, my interest rate ballooned to almost 30%!
I have 3 credit cards with 23, 25, and 29 interest rates without a single ding on my report, late payments or overlimit hits…nothing. I read somewhere that one of my card companies was jacking up rates for customers who were changing their spending habits from carrying a balance, to carrying none. And all of my other cards followed suit.
I don’t want to cancel them, because I have long credit histories with these companies, and I always pay my 1 card I use in full so the interest rate is immaterial, but it’s clear that the company tried to squeeze as much money as they could from me before I paid off the card.
THAT is what is wrong in my opinion, the arbitrary and money-grabbing changes in policies, rates, and terms that these companies make on a daily basis.
Julie – Wow. Your credit limit is 4 times your annual income!
Tyler – I do not plan on using the high credit limits. I got into trouble once, and I do not want to go back there. I am keeping the limits open for now, because they should help my credit score improve because of my debt to credit ratio. I need the boost in credit score to try to get a 0% balance transfer offer. Of course, I don’t really need a transfer, but I would like to pay the least amount possible in finance charges while paying off our debt so more of my payments go towards the principal. Once our credit cards are paid off, I will be lowering our credit limits.
When you think about it, many things are different than when our grandparents were our age.
Tim – yes, my credit score has been improving and only one of the cards asked for annual household income. I put in $40,000 and they upped the credit limit by $8,000 to make it $20,000. They were content with increasing our credit limit to half of our annual income.
Donna – great list, you mentioned quite a few that I haven’t even though of. Heh, if my college didn’t allow credit card companies on campus, I may not be in the mess I am in now. But then again…I still might be?
Lazy Man – you’re right. I’m using the rope to my advantage now to increase that FICO score.
Tim – That’s interesting that there is a definitional difference between credit and loan. I’ll have to look into that, it might be an interesting read.
http://select.nytimes.com/search/restricted/article?res=F00917FE345B0C728EDDA80994DC404482
This may be available only to TimesSelect subscribers, but I can copy it if anyone needs. I think this happens much more frequently than what Chris was talking about. In any case, what happened to Chris is not right, perhaps, but neither is it serious if no balance is being carried. Mr. Schwabel of the the above story kept getting his line increased by MBNA while continuing to always pay the minimum payment. But after awhile, and getting way up in the higher figures, they increased his minimum and interest rates such that he had been living on the card in the worst way. This is not advisable under any circumstances, but the disaster occurred also from doing this with one card. While this is not a site for talking so much about how to handle credit cards while carrying a balance, that still is what one is doing until it has been paid off. Mr. Schwabel naively thought he could keep paying his minimum on time and keep living of seemingly endless line increases, but at a certain point it must seem more profitable just to go ahead and give the hard karate chop. Had he used even this ridiculous amount of credit but not to the max, and divided on several cards, it wouldn’t have been quite this catastrophic. Some may think that’s the only way he could ‘learn his lesson.’ I don’t. He simply didn’t know. There is a lot of ‘common knowledge’ that even savvy people just don’t know.
If you carry a balance, I do agree with the others that the best thing is to have large lines and accept them to improve your rating. Whether it’s possible to resist using this additional line is just a chance that has to be taken. If one is already working 100% of the time on reducing debt, there is little worry that one would just start ‘big spending’ on increased lines, which is something that would happen if the person was already in the habit, like Mr. Schwabel, of spending without nearly enough caution.
So I think your estimate of what you’d pay if you maxed out on your lines is much lower than what it’d actually be. At some point, the score would be so low that the lines would be decreased, the minimum payments would be increased and the interest increased as well.
Even as a test, the bump up in your credit limit is a sign of what credit card companies do to make money. The higher the credit limit the more potential there is to charge which means higher finance charges… over time this adds up.
As for interest rates – credit card companies are using the clause in their agreements to “reserve the right to change the terms of this agreement (including the APR) for any reason at any time” to bump up interest rates and they do NOT have to give you a reason why.
There is big concern for the open credit limits and low monthly payments that keep people in debt for an incredible length of time – losing ground financially and emotionally because they believe they must be able to afford such credit.
It’s dangerous – flat out dangerous.
Of course, we expect people to be smart with money and debt. We are only as smart as our teachers in life – parents, spouses, mentors and role models.
I think there is definately something wrong with the credit card companies. It certainly isn’t altruism that prompts them to give us huge lines of credit — pure and simple it’s only to their benefit if you go out and charge up an unmanagable balance and lock yourself into the minimum payment trap. Especially now that Congress has helped them with bankruptcy laws that make it much more difficult to have bankruptcy as an escape route (not that I’m advocating bankruptcy).
In any event, I recently blogged about this at http://debtblitzkrieg.com/2007/02/22/experiment/. The upshot: While it’s not out of whack such that I have more credit balance than income, I have way more rope than I’m comfortable having. I’m quite proud at my progress paying down my debt, but I DO feel like a drunk who has an opened bottle of alchohol in their pocket to have over $20K in open credit at my disposal.
And this is interesting: I just got one card (limit $6000) paid off, and ever since then I’ve been getting flooded with letters from them saying they just noticed a trend of huge payments, and they were afraid they were losing my business, so here were some more nice balance transfer checks. Please don’t leave us beloved debtor! HAH!
you can always request to lower your credit limit
After paying off all of my credit card debt a few months ago, I wrapped them in a rubber band and put them in my dresser drawer. I only carry one on me for emergencies. I notice that living a cash-only lifestyle, I spend ALOT less money; a real lot less. I no longer shop online and make unnecessary purchases. Plus taking that weekend getaway trip means taking money out of the bank to pay for hotel, car rental, etc. Yes, I reserve with a credit card, but pay cash when I check out of the hotel or turn the rental car back in.
I gather I’ve saved about $3000 in 3 months by not using credit cards. And it’s all going into savings.
What’s important to understand is that banks take money from the merchants to process credit card transactions. This cost is passed along to you, the consumer, in the form of higher prices. By paying cash, you are helping fight inflation for everyone.
Living cash-only in a credit world.
It can be done.
They’re waiting for you to be late or miss a payment so they can jack the interest to 30% on the balance. I used to collect on credit cards. They’re piranhas.