Tuesday, March 29, 2016

Automatic Credit Line Increases - Why?

Credit card companies are not your friend.  Everything they do is in their own self-interest.

I mentioned before that when it comes to credit cards, there are strict rules you have to follow.  Personal credit card crises are something that happens to everyone at least once in their lives - sometimes more than once.   And often, many of these folks are the ones who are "living paycheck to paycheck" as they try to pay off credit card debt (and fail at it) for years or even decades at a time.

You laugh, but there are people still paying interest on a meal that ate ten years ago.   It happens - a lot.   Credit cards are the equivalent of the payday loan for the middle-class.

One of the games the credit card companies like to play (and they have a litany of games to play, believe me!) is to automatically raise your credit limit over time.   If you call them and ask not to raise your credit limit, they usually will comply.   But sometimes they "forget" and raise it anyway.  How convenient for them.

Why do credit card companies raise your credit limit?   There could be a number of reasons:
1.  They are nice, friendly, helpful people who want to see you succeed in life, and are trying to "help you out" by increasing your credit line.

2.  They are increasing your credit line to reduce the amount of available credit you have overall, making it harder for you to apply for a competitor's credit card.   If they can take up all of your available credit, you cannot take advantage of these "rollover" offers or go to a lower rate card.

3.  They are giving you more rope to hang yourself.   The more high-interest debt you accumulate, the harder and harder it is to get out of it.   $10,000 at 18% revolving interest would take 93 months to pay off at $200 a month.

4.  They want to induce you to spend so they can make more money on transaction fees and in interest charges.  The higher your limit, the more you can buy.

5.  They want you to think you are being "smart" by having a high-limit credit card.  After all, it is a sign of your financial "success" - right?
The wrong answer is #1, although most people believe that to be the right one.   No, really, they think the credit card companies are their friends who are so kind and generous as to offer free airline miles and preferred customer perks (which are only offered to a few hundred million "exclusive" patrons!).  This is, of course, idiotic thinking.

The remaining answers are correct.   The credit card companies want to tie you into their card, and their card alone.  So by increasing your credit line, your credit report shows less available credit for someone in your income range.   If you want to buy a car, a house, or get a different credit card, you may be stymied by the fact they have raised your limit so high.

Once trapped with their card, if you run up the balance (as 70% of Americans do, even though they don't admit it) the interest rates will make it nearly impossible to pay off the debt - or it will take years to get out from under it - even decades.

And here's the beauty part - for the middle class, credit card debts are usually not large enough to warrant bankruptcy.   So Joe and Josephine of Suburbia carry a nagging $10,000 balance on their "rewards" card that never seems to get paid down, and the credit card company collects interest at 18% for a decade.

You laugh again, but it happens, and happens a lot.   When I was younger, yes, I too carried a balance on credit cards with high interest rates.   And eventually, I had my own personal credit card crises as well.

Many folks in the middle-class refinance their homes to pay off these nagging long-term debts, but only after paying interest for years and years.   Once they make that lump-sum payment to the credit card company, the company sends them a letter saying, "Congratulations!  We've raised your limit!" 

  Getting trapped by credit card debt and getting out of it is much the same as how this mouse gets trapped in a bucket and spends hours trying to jump out - if he doesn't drown first.

And they say this for reason #5 - to make you think you are a financial genius for making horrific decisions - spending years paying high interest on consumer purchases and then rolling over the debt and amortizing it over 30 years while eating into the equity of your home like a termite.

Now some might say that I am being dramatic - that credit card companies aren't that, well, diabolical.   And well, you're right, they're not.  They are just smart business people and smart business people do what makes money for the company.   So they hire psychologists and marketing experts to built these mouse-traps.  They are very cleverly made and like in the video above, with each failure in the trap design comes a new innovation.   Customers declaring bankruptcy?   Pay politicians to change the laws so consumers have to "work out" the debt over time.   With each new move comes a counter-move, like a game of chess.

And even if there was a decent credit card company out there who doesn't play these games (such as Simmons Bank which offers a simple, no frills, low-interest card) they are often forced to get into the game or risk going out of business.   The business world is a race to the bottom, with the company willing to wallow in the muck the most being the winner.  That is why we have financial regulations and why they are a good thing.

Now, some of you may think you are a Lucky Mouse and you can "steal the cheese" and get away from the trap of credit cards.  The problem with this approach is that it is fraught with danger, and if you slip up, even once, well the trap is sprung and you are dead.

One way to avoid this trap is to call your credit card company and tell them to lower your limit to a comfortable level.   This, of course, presuming you have paid down your debt in the first place.   What that level is, depends on your income level.   And the credit card companies have a different number for different classes of people.   The man in the ghetto may struggle to pay off a $5000 credit card debt, while the man in the suburbs struggles with multiple cards totaling $50,000.  Same deal, different day.  And ain't it nice of those credit card companies to be so egalitarian?   They allow anyone to play!

What prompted me to write this is that I logged onto my credit card account today and saw, to my chagrin, that they raised the credit line on my business card from $5000 to $6500 without asking me.  And I had asked them to "lock" the credit line at $5000, which they obviously forgot about.

It is not hard to accumulate thousands and tens of thousands of dollars in credit card lines-of-credit.   With just two or three cards, you can be over $20,000 to $50,000 easily.   At the astounding interest rates charged, you can end up over a barrel in short order, if the shit hits the fan.   And if you fail to make even one payment on time, a "penalty" rate could kick in as high as 30%.   At that point, it could be "game over" for you and your finances.

Still think you are a Lucky Mouse?