How high should credit card limits REALLY be?

[boosami]

It makes me cringe to see folks with $25k/yr gross get approved for credit cards with $20k limits, but it happens. And these are folks who didn't lie on their applications, but were simply handed high limits to go along with their limited income. While income has something to do with it, it's really up to the discretion of the creditor to calculate how much credit to extend to any person.

How high should the credit limit be for people given their salary? What do you think creditors should take into consideration in determining limit for a particular applicant? Do you think a more apparent "ceiling" would help folks be more responsible with debt?

Discuss.

(Please don't flood this thread with "zero because credit cards are evil" responses, people who hate credit cards.)

[disneysteve]

Good question. I think CC limits should be calculated in the same way that they calculate how large of a mortgage you can afford. You should have to document that you have the means to handle the limit being granted. The application should involve a whole lot more than just stating your income because that says nothing about your actual ability to pay your bills. You should have to show your expenses and your other debts to show your actual disposable income.

Of course, we all know that it is best for your FICO score to not charge more than 30% of your limit, so if you can comfortable afford $1,000, you want a limit of at least $3,000 or so.

The other big problem is that the CC company doesn't want you to pay your bill in full every month. They make a fortune, in fact the vast majority of their income, on fees. They want you to carry a balance, as big and as long as possible. There is no incentive for them to give you an affordable limit.

[Multima$tery]

Good question. I think CC limits should be calculated in the same way that they calculate how large of a mortgage you can afford. You should have to document that you have the means to handle the limit being granted. The application should involve a whole lot more than just stating your income because that says nothing about your actual ability to pay your bills. You should have to show your expenses and your other debts to show your actual disposable income.

Of course, we all know that it is best for your FICO score to not charge more than 30% of your limit, so if you can comfortable afford $1,000, you want a limit of at least $3,000 or so.

The other big problem is that the CC company doesn't want you to pay your bill in full every month. They make a fortune, in fact the vast majority of their income, on fees. They want you to carry a balance, as big and as long as possible. There is no incentive for them to give you an affordable limit.

I can agree with your philosophy. And you're right! Credit Cards WANT you carry a balance. They WANT you to only pay the minimum - so that they can generate Huge interest off people. If you don't handle your credit cards they WILL handle you in the worst way that's for sure!

[GREENBACK]

The other big problem is that the CC company doesn't want you to pay your bill in full every month. They make a fortune, in fact the vast majority of their income, on fees. They want you to carry a balance, as big and as long as possible. There is no incentive for them to give you an affordable limit.

This is true but I believe it applies to any loan a bank makes.

[kork13]

Agree w/ Steve--good question, boosami.

I actually had to ask myself this exact question just last week, when I applied for a new CC to replace the 3 I currently have. What caught me off-guard was when they asked me what credit limit I wanted. I ended up basically figuring out what I expected would be the max I would probably put on it, and tripled it (as DS brought up, to keep my balance below 30% utilization).

Currently I have about 30% of my annual salary available in credit card limits, not including this new CC... Including it I'll be over 50%, which IMO definitely IS too high, so I'll be cancelling a couple cards after I get the new one.

But at the level I'm at right now (~30%), I'm pretty comfortable with that... It's enough for my expenses (while staying below 30% total utilization), but I'm also not concerned with how high it is either. But really, it's probably more than I need. As a general rule, I might suggest no more than 25% of your annual income. Obviously exceptions exist, and other factors are involved (such as self-employment, family, etc.), but I think if nothing else 25% is a decent starting point to work with.

[disneysteve]

This is true but I believe it applies to any loan a bank makes.

I think credit cards are different. Bank loans have fixed balances, fixed interest rates (mostly) and fixed repayment terms, plus they are collateralized. If you don't pay your auto loan, they reposess your car. If you don't pay your mortgage, they foreclose on your home. Credit cards have none of those things, plus the terms can and do change AFTER you borrow the money. I think a CC is a whole different animal than a car loan or mortgage.

Currently I have about 30% of my annual salary available in credit card limits

We have about 75% of our gross income in CC limits on our 4 main cards. We also have a couple of inactive cards. I don't know what the limit is on those, but probably another 5% or so. So we could really go on a major spending spree if we lost our minds.

[kork13]

So we could really go on a major spending spree if we lost our minds.

Yea, this is exactly what I was talking about when I said I wasn't concerned about how high my credit limit is.... if I were to have a $50k+ credit limit, I'd be afraid of how bad it could be if somehow, for some reason, they were to get maxed out. In the end, I balance it between what I need and what I'm afraid of!

Another thing to keep in mind.... How high do they NEED to be vs. how high SHOULD they be vs. how high CAN they be are all potentially 3 very different questions.

[GREENBACK]

[QUOTE=disneysteve;202831]I think credit cards are different. Bank loans have fixed balances, fixed interest rates (mostly) and fixed repayment terms, plus they are collateralized. If you don't pay your auto loan, they reposess your car. If you don't pay your mortgage, they foreclose on your home. Credit cards have none of those things, plus the terms can and do change AFTER you borrow the money. I think a CC is a whole different animal than a car loan or mortgage.

I agree that cards are different. I was merely referring to banks counting on people to make long term loans. I think the 84 month car loan, that I assume they still do, is about as bad as a cc that's maxed out and takes this long to pay off. You have fixed terms and know the deal going in with the car loan but the bank still makes a lot of money on this deal if you carry it this long.

I'm sure the banks would fight this tooth and nail as the first person to get a cc from a different bank and max out their limit would not now qualify for a new card from another bank.

[PrincessPerky]

I think if we try to set a number on what a CC limit should be then folk will start to look at the CC limit as an acceptable amount (or %30 of it as OK)

My husband between all his cards (he used to take advantage of 0% and all a lot more when he had time) Has enough credit to buy two of our houses. WELL more than his yearly income.

We do not use the limit of course.

Since a safe use of CC varies from person to person the acceptable limit would vary as well. for us it hasn't done us any harm to have all that credit availible...though I would prefer fewer cards myself.

On the other hand I doubt it would hurt me to have a smaller limit either.

I know of a case where a fellow went to buy a truck..ancient and busted. and wanted to not carry cash. He called his CC company to raise the limit and then had to call back to say yes I really want to buy this truck with it. SO in his case the limit needed to be high enough to buy what he wanted (paid off upon returning home)

[kork13]

I know of a case where a fellow went to buy a truck..ancient and busted. and wanted to not carry cash. He called his CC company to raise the limit and then had to call back to say yes I really want to buy this truck with it. SO in his case the limit needed to be high enough to buy what he wanted (paid off upon returning home)

My father has done this at least twice.... He's bought both of his last two cars by charging them completely onto a credit card, only to go home and pay it off a couple days later. One thing to be careful of though, some dealerships now add a 2-3% surcharge if you charge more than like... $3k onto credit cards.

[boosami]

My husband between all his cards (he used to take advantage of 0% and all a lot more when he had time) Has enough credit to buy two of our houses. WELL more than his yearly income.

We do not use the limit of course.

It seems wrong to me that a reason people have huge limits is because they are left over from past accounts that they will not close because it's bad for their credit score. Not wrong on the part of the consumer, but rather on the credit agencies and how they report/determine creditworthyness.

It all can escalate too quickly because of the greed of everyone involved (consumer and creditors). The more you spend, the more the creditors want to offer you credit. The more credit you get, the more you can spend. And then everything blows up, as we've all seen in the past six months.

Before the 1970's, credit cards were difficult to obtain. These days, you can get a $1,000+ limit with no job and zero income. In my opinion, the whole mess needs to be rethought. I'm not sure how, but someone who is maxed out on a credit cards simply should not be able to apply for a second!

[disneysteve]

Before the 1970's, credit cards were difficult to obtain. These days, you can get a $1,000+ limit with no job and zero income.

I agree 100%. The worst example of this is college students. I've said many times that when I was in college (1982-86), my friends and I would go around and apply for all the credit cards we could to get the free gifts they gave for filling out an application. We knew there wasn't a chance that we'd get approved because we had no income. So it was spend a few minutes, get a t-shirt or an umbrella or a 2L bottle of Coke or whatever.

Today, they very aggressively go after college students and if you've got a pulse and can sign your name, you get a card.

I did get a CC in college. A local bank (across the street from campus) had a special deal for students to get a card if a parent cosigned on the account. Today, that isn't necessary. We need to go back to those days.

[Seeker]

It seems wrong to me that a reason people have huge limits is because they are left over from past accounts that they will not close because it's bad for their credit score. Not wrong on the part of the consumer, but rather on the credit agencies and how they report/determine creditworthyness.

It all can escalate too quickly because of the greed of everyone involved (consumer and creditors). The more you spend, the more the creditors want to offer you credit. The more credit you get, the more you can spend. And then everything blows up, as we've all seen in the past six months.

Before the 1970's, credit cards were difficult to obtain. These days, you can get a $1,000+ limit with no job and zero income. In my opinion, the whole mess needs to be rethought. I'm not sure how, but someone who is maxed out on a credit cards simply should not be able to apply for a second!

I don't know that all of this is still true today.

Credit Card companies can and do close accounts for "lack of activity" -- this is getting more common with those of us who use one or two cards that offer rewards, and pay off in full each month. The CCs that do not offer rewards, tend to close out the accounts we carry and do not use, simply because they make no money from us.

Essentially it's up to each credit card company as to how to conduct their business. They do view people who keep a balance and do not PIF each and every month more favorably than those of us whom are wise users.

But all CC companies are looking at rates; many of mine have been upping rates. But it does not matter because I will not use the CC if I cannot pay in full for that item beforehand.

I agree that people without jobs should not be issued CCs; but who's going to enforce that?

I agree that people with maxed out credit are probably living beyond their means and when something happens, that will pretty much put these people in a losing situation. But who will enforce CC companies to not make money by transfer fees and issueing more credit?

It's people, us the consumer, that needs to make better choices. They the CC companies, are in it for the money; it's their business, they will not make choices that limit their income.

[kork13]

They the CC companies, are in it for the money; it's their business, they will not make choices that limit their income.

...except in order to make their income more secure. They know that people who file BK will only be paying back pennies on the dollar. It's in the interest of CC companies to get people to use them, but still be able to repay their debts. This is where the best chance for beneficial change to how the current mess could be changed. If the companies reel in the free-flying credit but in turn make their profits safer, it's still beneficial to them, and thus a course they could be talked into taking.

[Seeker]

...except in order to make their income more secure. They know that people who file BK will only be paying back pennies on the dollar. It's in the interest of CC companies to get people to use them, but still be able to repay their debts. This is where the best chance for beneficial change to how the current mess could be changed. If the companies reel in the free-flying credit but in turn make their profits safer, it's still beneficial to them, and thus a course they could be talked into taking.

Yes, true, but one other thought... CC companies also make money from where we use their cards.

Until more stores offer discounts for using cash, we will still use CC's for the rewards.