An interesting credit limit

by Rocket Finance

In the last year, we have refinanced our minivan, our home, our HELOC and applied for several credit cards that offered good sized bonuses. Our credit score has taken a bit of a beating – it was pretty high to begin with so we had a little room to play with. But our credit utilization is quite high and our income to debt ratio is also be considered high – at least for me. However, we are meeting our commitments each month and we have a plan to get us out of debt as soon as possible.

Anyway, we had been giving our credit a “rest” for several months until my wife received a credit card offer in the mail – and since I happen to like junk mail – I opened it to find an offer for a credit card with a no fee 0% balance transfer for 12 months.

I had my wife fill out the application and we sent it in. My wife is a homemaker and we are just making it financially so when we were approved for the card, I was mildly suprised. When the card arrived in the mail and I realized that she had been approved for a credit limit of 14,000 dollars, I was shocked! What were they thinking? We are not subprime borrowers, but we are close.

Most of our credit cards have limits of $5K to $7K – we only use our Chase Freedom card and while some cards carry a balance, we don’t pay any interest and the money is in liquid savings accounts so we can pay of the cards at any moment. The company to whom we applied for the card is Wells Fargo – the same company with whom we have our HELOC. There is no way that we are going to charge $14K on a credit card – we aren’t even going to use it at all – other than to transfer a balance and make a little money off the interest.

Some thoughts and questions:

  • Why would a company give such a high credit limit to someone who makes $2K a year?
  • Why would such a high limit begiven to someone whose house is 100% mortgaged?
  • No wonder banks are in trouble with the subprime mortgage mess. They are throwing around money like clowns throw candy at a parade.
  • Wells Fargo is said to have lower exposure to the subprime mess – they are considered to be a more conservative lender.
  • I wonder if they used our credit reports from when we refinanced eight months ago? Our report is very different now
  • Can they do that?

That said, the $14K credit limit is appreciated because it will help our overall ratio of credit used to credit available to go down. I once knew a couple who immediately spent their credit limits on every card. They thought that if they did not exceed the limit and could make the minimum payment, they were doing well financially. I hope they never get a hold of a card like this.

I wonder where this world of staggering debt and easy credit will eventually lead us?

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  1. 3 Responses to “An interesting credit limit”

  2. By Aaron Stroud on Dec 22, 2007 | Reply

    William Bernstein has suggested that returns might be lower in the future because the globe is awash in capital.

    There is so much money chasing after investments that returns are lowered. Some people compensate by taking on riskier investments in hopes of a higher return. This behavior is only amplified when society takes away important incentives to behave responsibly (bailouts for large companies, generous bankruptcy laws, etc).

  3. By rocketc on Dec 22, 2007 | Reply

    I appreciate the insight, although I had to read your comment a few times to absorb it all (due to my puny brain, not the carity of your comment) 🙂

    I definitely believe that even though it hurts sometimes, we must keep societal punishments for bad debt in place.

  4. By Aaron Stroud on Dec 22, 2007 | Reply

    Re-reading my post, I can see a few places where I could improve my explanation.

    Sometimes consequences are difficult to watch or experience, but they are important. They can even be vital sometimes because consequences act as an incentive to avoid an undesirable behavior.

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