4 ms·

Credit-Card Users Got Bigger Limits. Then They Racked Up $1T

15 points by marban 3y ago

jncfhnb 3y ago
Seems to me that most people with credit card debt are financially illiterate or just treading water financially. The article claims that as people were granted larger credit lines, that their proportion of credit used remained constant. These two claims don’t make a ton of sense to me. I wonder if it’s not the reverse: creditors are incentivized to continue to lend you more credit to sustain a specific level of credit utilization. Perhaps incentives towards creditors and the defaults of their clients are calibrated with a certain moral hazard on their side…
- jstarfish 3y ago
  > The article claims that as people were granted larger credit lines, that their proportion of credit used remained constant. These two claims don’t make a ton of sense to me. That law about gas expanding to fill all available space also applies to spending of credit and income. Most people spend up to the limit. Raise the limit, the amount spent increases too. New job? Time for a new car. Promotion? Let's buy a camper. Thus, proportion of credit used always remains constant. The fees are absurd these days too. It dawned on me one month where I made the minimum payment but it appeared it hadn't gone through. I looked into it, and found they charged me a yearly fee almost as much as the monthly payment. At that point I tripled the minimum payment I was making, because between interest and that the balance was going nowhere. > I wonder if it’s not the reverse: creditors are incentivized to continue to lend you more credit to sustain a specific level of credit utilization. Yep. Your existing lender can raise the limit, or someone else can offer you a new card. The former presents no friction, and you may well spend a chunk of it (and pay interest on it) before you even notice you have it.
  - jncfhnb 3y ago
    The yearly fees are the costs of the cards and the benefits they offer. Typically only cards with valuable perks cost money. Could you not just pay the balance each month?
- Spivak 3y ago
  Mine did that, my spending increased due to gradually "onboarding" more expenses to the CC from my debit card and they pretty much immediately bumped my limit so I would stay at around the ideal utilization for credit score purposes. It was pure win for me now that I'm buying a house and have a >800 credit score with zero installment loans. Have never paid my CC company a dime of interest. And oh god why would you? The interest rate is unreal.
- toomuchtodo 3y ago
  Consumers are treading water financially. Creditors are also incentivized to continue to lend, due to the profit structure. Increase limits, capture as many fees and interest as possible, charge off and ship the debt to a debt buyer.
  - jncfhnb 3y ago
    People are fond of the “ship debt to a debt buyer” narrative but I don’t think it makes as much sense as people assume. The debt buyers are presumably rational with their pricing. The failure of 2008 was the unanticipated correlation of the default risk of individual debtors. Which I think is less relevant for credit card debt. And presuming the prices are rational, making the debt riskier to sell off shouldn’t make a lot of sense. Capturing fees in the short term but incurring defaults feels like it should be a net loss to the creditors. If it’s not I feel this deserves some regulation.
    - jstarfish 3y ago
      > The debt buyers are presumably rational with their pricing. They have to be buying them for pennies on the dollar. Every time collectors harass me, they obviously want the full amount but if the previous lender couldn't collect it, they don't waste their time on the same approach. They always push for quick settlement as a fraction of the actual balance (25% or so? Been a while). Whatever they pay for the debt must be substantially less than n% of the balance.
      - jncfhnb 3y ago
        Sure. But the fraction ought to consider the probability of repayment is what I’m saying. You shouldn’t be able to consistently profit by making accounts larger and riskier and selling them for higher amounts.
        toomuchtodo 3y ago
        I agree. I would highly recommend you file a complaint with the CFPB on the matter.
archo 3y ago
https://archive.is/oaoFF https://archive.is/oaoFF
sharemywin 3y ago
I just don't understand how personal credit card limits can be allowed to go higher than about 10% of yearly income.
- deleted 3y ago
  [deleted]
- BenjiWiebe 3y ago
  It's nice being able to make an expensive purchase with my credit card. My savings are a lot more than 10% of my annual income.
  - Spivak 3y ago
    Bingo! I love having an absurdly high credit limit for big purchases. It wrecks my credit score for like a month but then immediately recovers once the algorithm realizes I'm still not carrying a balance.
- edmundsauto 3y ago
  This might be a rational approach if your goal is to minimize defaults. CC companies, however, look to maximize their revenue - and that happens when people are over extended. Their incentive is to overextend you just a little bit, so you are constantly paying them. If you drown, they went too far and killed the golden goose - but constantly in debt is their cash cow. It also, ultimately, pays for people like me who pay on time every month and enjoy the points game.

15 points by marban 3y ago

Seems to me that most people with credit card debt are financially illiterate or just treading water financially. The article claims that as people were granted larger credit lines, that their proportion of credit used remained constant. These two claims don’t make a ton of sense to me. I wonder if it’s not the reverse: creditors are incentivized to continue to lend you more credit to sustain a specific level of credit utilization. Perhaps incentives towards creditors and the defaults of their clients are calibrated with a certain moral hazard on their side…

jstarfish 3y ago
> The article claims that as people were granted larger credit lines, that their proportion of credit used remained constant. These two claims don’t make a ton of sense to me. That law about gas expanding to fill all available space also applies to spending of credit and income. Most people spend up to the limit. Raise the limit, the amount spent increases too. New job? Time for a new car. Promotion? Let's buy a camper. Thus, proportion of credit used always remains constant. The fees are absurd these days too. It dawned on me one month where I made the minimum payment but it appeared it hadn't gone through. I looked into it, and found they charged me a yearly fee almost as much as the monthly payment. At that point I tripled the minimum payment I was making, because between interest and that the balance was going nowhere. > I wonder if it’s not the reverse: creditors are incentivized to continue to lend you more credit to sustain a specific level of credit utilization. Yep. Your existing lender can raise the limit, or someone else can offer you a new card. The former presents no friction, and you may well spend a chunk of it (and pay interest on it) before you even notice you have it.
- jncfhnb 3y ago
  The yearly fees are the costs of the cards and the benefits they offer. Typically only cards with valuable perks cost money. Could you not just pay the balance each month?
Spivak 3y ago
Mine did that, my spending increased due to gradually "onboarding" more expenses to the CC from my debit card and they pretty much immediately bumped my limit so I would stay at around the ideal utilization for credit score purposes. It was pure win for me now that I'm buying a house and have a >800 credit score with zero installment loans. Have never paid my CC company a dime of interest. And oh god why would you? The interest rate is unreal.
toomuchtodo 3y ago
Consumers are treading water financially. Creditors are also incentivized to continue to lend, due to the profit structure. Increase limits, capture as many fees and interest as possible, charge off and ship the debt to a debt buyer.
- jncfhnb 3y ago
  People are fond of the “ship debt to a debt buyer” narrative but I don’t think it makes as much sense as people assume. The debt buyers are presumably rational with their pricing. The failure of 2008 was the unanticipated correlation of the default risk of individual debtors. Which I think is less relevant for credit card debt. And presuming the prices are rational, making the debt riskier to sell off shouldn’t make a lot of sense. Capturing fees in the short term but incurring defaults feels like it should be a net loss to the creditors. If it’s not I feel this deserves some regulation.
  - jstarfish 3y ago
    > The debt buyers are presumably rational with their pricing. They have to be buying them for pennies on the dollar. Every time collectors harass me, they obviously want the full amount but if the previous lender couldn't collect it, they don't waste their time on the same approach. They always push for quick settlement as a fraction of the actual balance (25% or so? Been a while). Whatever they pay for the debt must be substantially less than n% of the balance.
    - jncfhnb 3y ago
      Sure. But the fraction ought to consider the probability of repayment is what I’m saying. You shouldn’t be able to consistently profit by making accounts larger and riskier and selling them for higher amounts.
      - toomuchtodo 3y ago
        I agree. I would highly recommend you file a complaint with the CFPB on the matter.

archo 3y ago

https://archive.is/oaoFF https://archive.is/oaoFF

sharemywin 3y ago

I just don't understand how personal credit card limits can be allowed to go higher than about 10% of yearly income.

deleted 3y ago
[deleted]
BenjiWiebe 3y ago
It's nice being able to make an expensive purchase with my credit card. My savings are a lot more than 10% of my annual income.
- Spivak 3y ago
  Bingo! I love having an absurdly high credit limit for big purchases. It wrecks my credit score for like a month but then immediately recovers once the algorithm realizes I'm still not carrying a balance.
edmundsauto 3y ago
This might be a rational approach if your goal is to minimize defaults. CC companies, however, look to maximize their revenue - and that happens when people are over extended. Their incentive is to overextend you just a little bit, so you are constantly paying them. If you drown, they went too far and killed the golden goose - but constantly in debt is their cash cow. It also, ultimately, pays for people like me who pay on time every month and enjoy the points game.