Sunday, August 30, 2015

Credit Card Limits

High credit card limits are not a sign of financial success but impending financial doom.

As I have noted in other postings, if you have to have a credit card, pick a low limit and don't let them raise it.  Never have more in credit card limits than you can readily pay off in one month.

Some folks read this, and think it is apostasy - having been carefully programmed by the credit card industry to think a high credit limit means they are doing well in life.  "And besides," they say, "suppose you want to travel?  You might need that high limit if you are traveling overseas!"

Well, bullshit.   That is just another excuse to self-justify a suicide attempt as financial acumen.

We travel four months a year, and having a low credit card limit is not a problem.  Why?  Simply because we can, from anywhere in the world, go on the Internet and make a payment on our credit card and "zero" the balance in a matter of days.   There is little risk of "going over" our credit card limits.

"Well, suppose you don't have the cash to pay off the bill?"

Well, if that is the case, why the fuck are you taking an expensive vacation in the first place?  That credit card bill will have to be paid off when you get home.   If you don't have the money to travel, don't go, or find less expensive ways to travel.

But it begs the question, why do credit card companies routinely hand out to people, credit lines that are often in excess of their annual income?

The simple answer is, of course, that you can make more money ruining people today, rather than establishing a mutually beneficial business relationship.  The name of the game at the credit card company isn't collecting some paltry 3% transaction fee on everything you buy.  The name of the game is to collect 18% revolving interest on an intractable credit card debt you ran up - effectively charging you double for everything you purchase.  It beats the snot out of 3% transaction fees, which they can collect only once.  Interest compounds every month, and you collect it over and over again.
And to encourage you to do this, they hand out credit cards with $10,000 or $20,000 or $30,000 credit lines.   And yes, in the past, I've idiotically taken those deals and thought what a smart fellow I was to have so much "credit" at my disposal.

How much of a credit limit is "too much" of course depends on your circumstances.  For me, $5000 is a nice round number.  If my credit card balance is over that, well, something is wrong.  And that "something" is basically living beyond my means.

For others, it may be $2000 or $1000 or $10,000.  The point is, don't let the credit card company tell you what credit line you get, you tell them what you are comfortable with and call them and ask them to lock you limit (no automatic increases).

Credit card fraud is rampant.  As I have discussed before, my credit (and debit) cards were stolen in the past.  Chances are, you've had it happen to you.   You would think that lower credit limits would limit the amount of exposure the credit card companies have to fraud, wouldn't you?  But the low limits, while limiting their exposure to fraudulent transactions, mean lower profits from compound interest payments from Mr. and Mrs. Middle-Class who are "living paycheck to paycheck" and struggling to pay off their intractable credit card debt.   Credit card fraud, to them, is a minor nuisance and part of the cost of doing business.   Frankly, they could care less - the cost of averting fraud exceeds the money saved.

So they fold this into their cost basis, which is why, in an era of tiny interest rates and fractional inflation, we are lead to believe that 13.9% interest is a "good rate" on debt.    The card companies could lose 25% of their charges to fraud and still make a profit, when they are collecting compound interest at "penalty rates" of 25% to 30% in some instances.

Sadly, credit cards, at least for now, are for many a necessary evil.  You can't rent a car without one - or a debit card with a high balance.   It is hard to travel without one.   It is hard to do a lot of things without one.

Like a loaded hangun, a credit card can be a useful tool - or a dangerous toy that could damage you or a loved one.   They have to be taken deadly seriously.


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