Why Such High Limits on Credit Cards? / by kevin murray

While not every American has a credit card and not every American has a credit card with a high credit limit, the availability of such to the average American of at least a decent credit rating score is simply astonishing.  Credit cards are available today with limits of $5,000, $10,000, $25,000, $40,000 and more, and I'm not talking here about special credit cards such as the American Express Centurion card or cards of that ilk, but your basic, standard credit cards that are typically issued to the consumer without a mandatory annual fee.  What is especially interesting is that these high credit card limits are being issued out to consumers to which the banks that issue these credit limits are essentially issuing credit without any associated collateral, so that these are unsecured loans to the consumer.  While it may be true, that banks have rights to get those funds back from the consumer, should the consumer miss his payment or payments or fail to meet his credit obligations, the pathway to recovering this money for the banks is certainly not quick, nor paved smoothly, and it definitely costs banks time, money, and legal fees to go through the process of collecting this money.


The first question that must be asked is why do banks issue so many credit cards with healthy limits on them to consumers in the first place to which they know for a certainty that collecting money in arrears from the consumer is going to be both time consuming and expensive?  The most basic reason is that banks are convinced that higher credit limits, leads to more credit in aggregate being used by the consumer and subsequently that certain consumers, will be unable or unwilling or uninterested in paying off their balance in full each month, and therefore that interest rate that is charged to the consumer is where the banks will make their profit, to which banks understand the law of big numbers, that is to say, the more that the consumer owes, the more that the consumer has to finance over a period of time, the more profitable the loans are to the banks.


Still, you would think that banks would want some collateral attached to their loans but banks feel confident that they can effectively monitor your credit usage and worthiness in real time and make any adjustments that they need to make "on the fly",  because what the banks give, they can also take away. Most consumers are somewhat unaware that the banks do have recourse to effectively lowering one's credit limit, typically without notice, and only having to provide a 45-day notice if by lowering your credit limit it would effectively put your balance above that new credit limit.  However, it gets worse for the consumer, because just like that proverbial snowball rolling down the hill, the lowering of your credit limit by one bank will often start a chain of events to which typically the competing banks will also lower their credit limit on you because your credit capacity and your usage percentage are above pre-determined industry norms. 


This means in essence that although the banks will issue high limit credit cards, they and not you, control whether that limit will be lowered, and effectively closing you out of the credit business, taking for instance what was once a credit limit of $10,000 and perhaps lowering it to $500 without your consent.  For those that have become addicted to their credit line and credit in general, these lowering of limits, seemingly overnight, can be a very bitter pill to swallow.  The high limits on credit cards are essentially for the purpose of getting the consumer to spend more now, spend more than you really can afford presently, and for you to worry about tomorrow, tomorrow.  While most people are deliciously happy upon receiving their first bona-fide credit card, happy too are the banks, just like a great white shark.