Another in the flood of stories on people having their credit lines cut This has nasty repercussions for their credit scores, pushing their balances to 50% or more of their total credit.
As in many of these stories, what's not made clear is why the credit lines are being cut. The man featured claims to have carefully kept the credit cards he uses to finance his business used at no more than 1/3 of maximum capacity. This seems like an ideal customer.
But, like many of the people featured in these stories, their Exhibit A is in the construction business. The companies cutting his credit lines are probably right that it's dangerous to give him too much room to run them up.
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"Brown, who is a mortgage broker in addition to his construction business, said..."
Wow, really? I can't imagine why anyone would think he's a risky borrower...
"...Brown, who uses credit cards to fund his home-building company..."
No, no risk here. Can't understand why they would cancel this guy's cards.
I've been reducing my credit card balances (built up due to medical necessity) and have had BoA reduce my credit limit, twice.
I've been on time with payments, and have only used two cards AT ALL in the past year, (one for me, one for my wife, to keep things a secret) for online Christmas purchases ( The reason given: balances of revolving credit were too close to the limit.
So with a stroke (or two), BoA made the situation worse, increasing the risk that other lenders will come to the same conclusion.
Full disclosure: I am not the Brown of the story, nor am I related to him in any manner. I'm a mechanical engineer, employed by an AF contractor.
Huh, remember all the people arguing that only banks, not borrowers, were to blame for the mortgage crisis, because they shouldn't have lent to such risky borrowers?
We'll see if they'll be consistent or if an attempt to control CC risk will be cast as a grave injustice.
This goes back to your "Moral Bankruptcy" piece. You make an argument there about why people should feel a moral obligation to pay the debts they have taken on, because a society that doesn't risks failure. This idea, however, is based on the notion that both parties are operating in good faith. Credit card companies look for anyway they can to maximize their profits and minimize their risk. Furthermore, they hire lobbyists to slip amendments into legislation that favors their interests above and beyond those of their customers. In short, they are not acting in good faith. And the banks that offered mortgages to people who should not have received them were not operating in good faith either. They were working on the assumption that if the borrower couldn't pay the mortgage, the bank would get the property back, but it would be worth more. As long as those companies don't operate in good faith, their customers should feel no moral obligation towards them.
But the biggest problem with both this and the Moral Bankruptcy posts is that you're operating on the "rational man" theory of economics, when there's no such thing. People do not operate rationally, and to go back and criticize them for not doing so is useless and changes nothing in the future.
People not operating rationally richly deserve to die of the dumbs.
Remember that someone who keeps their balances low and always pays them off is a lousy customer for a credit card company - they incur a fixed expense to serve them and receive no incremental revenue from them.
Credit card companies prefer people with high balances, that wind up paying lots of interest charges and finance fees...
"And the banks that offered mortgages to people who should not have received them were not operating in good faith either."
If they were acting in bad faith you assume they knew housing prices were going to decline. I'm certain that upwards of 85% of buyers, realors, mortgage brokers, bankers honestly and sincerely felt that prices would continue to rise.
For example, they asked the CEO of mcmansion builder Toll Brothers how real estate prices could continue to rise. He felt that in the future middle class people would spend 50% of their income on housing. I'm willing to believe that when he said that he honestly belived that it was true.
Brian: Are you sure that's entirely correct? To benefit from the rewards programs, I use my two credit cards for every purchase, from coffee to car repairs, and I pay them off each month.
As I have never paid a dime in interest/finance charges, the credit card companies are certainly not getting rich on my business, but I have little doubt they make a profit on the merchant fees they receive every time I use my cards.
http://truecostofcredit.com/ is an interesting site for anyone curious about the merchant fees charged on routine purchases.
Well, they may be good customers, and banks are just desperately trying to get their balance sheets to be less risky.
We bought a house using an 80/15/5, where the 15 was a HELOC. They gave us a 75k credit line; we used 50k when we bought the house. Within 18 months, we'd paid it off, but kept it open because having 75k of available cash in an emergency was better than not.
One year ago, the bank slashed the HELOC to 30k because they didn't want the exposure, not because of anything about us. They said our home value was lower, but didn't want to have anyone come out and assess. Instead, they justified it by using the county's assessed value for our home--a number which had risen 100k since we bought the home, but was, as most are, historically low compared to sale prices. It was obnoxious, and it happened to thousands of people at the time. but by lowering the loan, they had less risk on paper, even if we had no change in anything else financially.
CC companies are doing the same thing, limiting their possible exposure on paper, as much as possible.
Whatever its worth, I was in a Bank of America on Friday, transferring money from one account to another, and was offered an approved credit card by the teller.
I have no credit with BOA, not sure how they determined I'm qualified. Perhaps because one account has been open for 39 years -- it's my paper boy account.
Last month, I went into a credit union and jointly applied for an unsecured loan with my son, who has zero income. He's a senior in college doing an unpaid internship. We got the loan.
So if your credit score is good, I think money may even be easier to borrow.
Remember everyone. If it is credit, then it is not your money. You have no right to it. If BoA doesn't want to lend you a buck for the vending machine, either find someone else to, or shut up.
among the many good reasons banks are cutting limits are that their is a huge overhang of credit commitments outstanding
under Basel II - the capital standards that big banks are judged - they must hold capital against this contingent liability. If you have a $50,000 limit, they might cut it to $30k to reduce their capital costs - and the market's perception of the liquidity problem they could face if all their customers drew down their credit line at once
One thing about stories- the "Man on The Street" stories in the press-, the ones where we're supposed to feel sorry for the subject person, is that that person has invariably done something dumb or risky: taken out a cash-out refi; funded a construction company with credit card debt; bought 5 rental properties with minimal equity. As warm-hearted a guy as I am
If someone has a health crisis or other really bad luck that is one thing, but the bone-headed, obliviously risk behavior of so many people is beyond me.
Hmmm...I hadn't thought of that. Over the past year, I've been reducing my credit card debt, but I've also been paying off and cancelling credit cards to simplify my financial life. So my debt probably is more than 50% of my credit line. But not because I've run up my debt, but rather I've freely chosen to reduce my credit.