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A primer on credit limits

Every credit card has its limits. Everybody knows that.

But do you know what your credit line says about you? Or the limits that hefty credit card lines can place on the rest of your financial life?

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Let's take a look.

First off, a credit limit is much more than a cutoff point for spending. It's a reflection of how a particular credit card company gauges your credit worthiness and your likeliness to charge away on their card.

"Two banks can look at the same individual and have a different view of their creditworthiness," says John Grund, a partner with First Annapolis Consulting Inc.

And that's why one issuer might look at your credit record and offer you a card with a $5,000 credit line and another issuer might offer you a card with a $10,000 credit line.

In general, the better your credit, the thicker your credit lines tend to be. Some issuers woo credit card customers with huge credit lines straightaway. Other issuers will wait until you've made a few months of on-time payments before boosting your credit line.

For example, after six months of on-time payments, an issuer might boost a $5,000 credit line to $7,500 or higher. And while issuers tend to limit credit line increases to once or twice a year, they're constantly monitoring each customer's credit status.

"What they want to see is demonstrated patterns of timely payments and no delinquencies," Grund says.

A longer line doesn't mean freedom
If a credit card issuer likes what it sees in your credit and payment records, those credit line increases will keep right on coming, whether you can actually afford them or not.

"A lot of larger issuers run automatic line increase programs," says Ali Raza, a vice president at Speer and Associates Inc. "They use that opportunity as a loyalty-building tool and to increase balances."

And it's working. Credit lines and debt levels are swelling. It's been happening for years.

In the go-go 1990s, competition in the credit card industry was so fierce that issuers offered cards to more consumers without established credit histories, including college students, and to more folks with less-than-perfect credit.

Issuers also courted good credit customers with thicker and thicker credit lines.

The result? A massive increase in the number and size of consumer card lines.

Today, many credit card customers have more available credit than they could ever need or handle.

The numbers reveal the plight
Consider these statistics from Demos, a nonpartisan and nonprofit public policy research and advocacy group in New York.

  • Between 1993 and 2000, the credit card industry tripled the amount of credit it offered to customers from $777 billion to almost $3 trillion.
  • The average card-holding household now has six credit cards with an average credit line of $3,500 on each for a total of $21,000 in available credit.

This massive marketing and extension of credit lines has led to a big jump in consumer credit card debt. Whether out of temptation or financial necessity, many Americans have run up big balances on their super-sized credit lines.

Estimates vary, but the Federal Reserve Board estimates that the average household has $8,000 in revolving debt, most of it in credit cards.

"These balances are unmanageable for families struggling to make ends meet," says Heather McGhee, a program associate at Demos. "We talk to families all the time with $40,000 to $50,000 of credit card debt and they'll be paying off credit cards through retirement."

Think twice before taking offers
Anyone carrying a lot of credit card debt should probably rebuff offers for credit line increases.

Why agree to a bigger credit line when your current card debt is already draining your bank account? Your top priority should be paying down your current debt.

For tips and strategies for paying off credit card debt, check out this Bankrate.com article.

And it's not a good idea for any card customer to view a credit line increase as a signal to spend.

"They don't know your financial situation. They're looking at whether you've paid as agreed," says Bonnie Spain, chief executive officer of the American Center for Credit Education.

"They don't know if you can afford the increase. Only you can determine if you can afford the additional payment and the additional debt."

Turning down a credit line increase is easy. All you have to do is call an issuer and ask.



-- Posted: Dec. 15, 2003




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