A primer on credit limits
Every credit card has its limits. Everybody
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?
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
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
"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
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
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
Turning down a credit line increase is easy. All you have to do
is call an issuer and ask.