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Don't let explosive
debt rule your life: Set your own credit card limits
By Lucy
Lazarony • Bankrate.com
Know when
to say when.
More and more banks are using high
credit card lines to woo new customers and encourage big balances,
and consumer experts are urging people to cap their own card lines
and reject unnecessary extensions of their credit.
Is it affordable?
"People should not be afraid to say 'no'," said Steve Rhode, president
of MyVesta,
a counseling service for people in financial crisis. "Just because
someone is extending them credit doesn't mean they can afford it.
Ultimately, consumers have to take responsibility for their finances."
Linda Sherry, editorial director for Consumer
Action, a consumer advocacy group based in San Francisco, encourages
people to call the bank after every credit limit hike. Be persistent.
"You have to make the effort. Call the company
back and they'll put it back down," Sherry said. "And you have to
call every time."
Setting
the limits
"Overall, no one should have more than $10,000 available on a credit
card," Sherry said. "And there's many people out there who should
have a lot less because of their income."
Stephen Brobeck, executive director of Consumer
Federation of America, agreed.
"In general, households should not carry lines
on credit cards that exceed 20 percent of gross income," Brobeck
said. "And smart consumers carry no credit balance from month to
month." Brobeck sees high credit lines, especially those targeted
toward low- and moderate-income households, as a key factor in the
growing number of personal bankruptcies.
Why all the fuss about unused credit lines?
First off, lenders view all open credit lines as potential debt.
Too much unused credit may affect a person's ability to qualify
for a home or car loan.
"Unfortunately, too much available credit can
hurt you if you apply for a mortgage or a car," Rhode said. "It's
actually counted against you."
Enforcing
the limits
To avoid racking up high credit lines, close off all unused accounts,
including department store cards. Be sure to cancel old credit card
accounts after transferring balances to a new card. And rein in
credit limits on active cards as well.
Following the 20 percent guideline, households
with gross incomes of $25,000 should cap credit lines at $5,000.
Households with $50,000 should cap lines at $10,000. And only households
with gross incomes of $100,000 or more should allow their credit
lines to rise to $20,000.
Keeping credit limits in check not only improves
a person's credit, it can also improve their bottom line. The reason:
The higher the credit line, the more people are likely to spend
on the card.
"The problem is people's credit card spending
is more based on the limit on the card than anything else," Rhode
said. "They'll say 'I can use the card because I still have more
room.' "
Consumer Action's Sherry agreed.
"For some people, it's a temptation. It's like
someone giving them a blank check," she said.
Keep
it simple
"Simplify your life as much as possible," said Howard S. Dvorkin,
president of Consolidated
Credit Counseling Services in Fort Lauderdale, Fla. "Everybody
takes Visa. Everybody takes MasterCard. Why get six different bills
in?"
One or two credit cards is more than enough.
Having an empty credit line set aside for an emergency is fine,
but experts point out that a $2,000 to $3,000 line will cover most
emergencies.
Plus experts advise people to keep some emergency
cash in reserve as well. Otherwise, when something happens -- the
loss of a job, an illness or an accident -- a person may be forced
to revolve big balances month after month on their credit card.
Ideally, you protect yourself against that kind
of emergency by saving three to six months of current income in
a savings account or other instrument.
-- Updated: Nov. 11, 2003
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