San Diego Housing Bubble News and Analysis

You have a balance of $50k on one of your credit cards and you think they don't know how to price risk?

I think that they are very smart to yank your limit.

Yeah, the credit card company doesn't know that you put that $50K in the bank. For all they know that money's long gone and you may lose your job in this economy. I understand why you would be upset, but I can't blame the B&N credit card company for their actions.

Actually, this is one of the MORE rational decisions I've seen by a financial institution in the recent insanity. Pay off the $50K and I bet you'll see your credit limit on the Barnes & Noble card increase. This is the price you pay for financial gamesmanship. 2.5% on $50K is $1,250 pre-tax. After tax, probably $900 or so. And you're having to pay down the balance with a minimum payment, so you're not getting the full $900 in the first place. And we're assuming you didn't have to pay a 3% transaction fee to get the $50K, which is highly unusual. All in all seems like waste of time given the hassle involved and the pittance of a return. I mean, why bother? I don't get it.

many times the 50k in assets. but it's still worth it to me personally to make even a few hundred bucks on this kind of arbitrage. my fico's still over 700. fees were lowered to
1% on my request. moneys in fdic insured acct. minimal risk. if I see a quarter on the street i pick it up. i got the money for a year. interest rates were higher when i got it. but even at 2.5%, probably an hour's work, including setting up the automatic payment and calendaring the end date 1.5% of 50k, 750.00? if I saw 750 lying in the street i would definitely pick it up, wouldnt you? that's how i see this money. it's just lying in the street. I also keep it in an easily tradeable account where i can trade stock in the evnt of a cataclysmic event. I'm really not upset, it's just, that was my regular everyday card and i liekd using it. The credit card company evaluated the risk based on one single data point. kinda like letting someone have a house just cause they have a good fico score without asking more...i think the odds of me actually defaulting on that 4k credit card (never ever been bankrupt, etc.) are as low as it gets, actually. if i had a house, i'd default on the mortgage waybefore id default on that credit card. i liekd that credit card. i liekd getting thos ebarnes and noble gift card. i alwaysam in barnes and noble and we read alot...i think i was a good customer! well, whatever, it still has 500 on it, i can still take it on special trips when we go to barnes and noble (you get a 5% rebate on barnes and noble purchases. ) but i cannot buy groceries.

I know. I got a friend who does the same stuff. He goes around getting these zero percent cards. I think he got 3 total. He takes the money out and puts in CD's. By the time you pay all the hidden costs and taxes and encumber your credit its not worth it at all.

What makes evern nuttier with him is he has about $2m in cash and his daddy who is in his early 80's has about $20m in cash and stuff.

John

If you pay off your card every month, they aren't making any money off you. Pair that with the fact that you have a 50K balance on another card and they have an excuse to lower your limit.
Guido and I put everything we buy on our cash rewards cards and pay them off every month too. So we get cash back for our purchases and don't pay a cent of interest. I'm sure our card companies would love to dump us or lower our limit too.

I think Meredith Whitney covered this a month or so back. Credit card companies are going to reduce thier overall limits in the next year or so by over $1T as an industry. They're realizing their exposure to default risk is shooting up in this economic contraction.

For me personally, a waste of time. Yeah, $900 for ten minutes' work seems nice. (Although it's probably more like a couple of hours when you factor in interpreting the fine print, calling the credit card company to be sure you understand it properly, setting up an online payment, etc.) But it's not worth the brain space of keeping track of it. I've gotten all the same offers and never even considered it. But if you're scraping along and $75/month of after-tax money is meaningful to you, then by all means, knock yourself out.

Regarding risk, I wouldn't offer anyone credit who engaged in these silly games. Spend your time improving the value of your human capital, not trying to game the credit card companies for a few hundred bucks. You'll earn more in the long term and won't have these problems. But that's just me. To each their own.

You may not like the fact that you are falling into a tail end of the risk profile but the facts are that the credit card companies are far better at pricing risk than any other institution.

Additionally you said that they are really not making any money on you so why is it not rational to cut you off.

High credit balances demonstrate a higher risk. If you are trying to game the system simply open up additional credit card and keep the limits under 30% of overall credit balance. If the goal is to continue to arbitrage the situation no sense complaining simple play by the rules and open up additional Credit Cards, put Balances onto these and pay down part of the 50 K on the other.

My credit cards are being closed due to inactivity. I could keep them open but at this point it just doesn't matter to me and the reduction of credit is so minimal that it really isn't going to impact my credit.

Given how many folks have the option of utilizing this "strategy" and, yet, choose not to, the obvious answer is yes.

You've got it right here, in a nutshell.

Our Barnes and Noble credit card got cut from $1200 limit to $500 limit, "to better fit our spending profile" (or something similar).

I would say that the letter is a mail merge, where the reason is selected randomly from a list of plausible phrases generated by marketroids.

my interest is mainly do credit card companies actually have any idea what the risk really is in the current economy? I'm sure they have all kinds of neat mathematical models based on how things have gone in the past, but I'm wondering whether any of it means a dman now. Maybe they're just freaking out and cutting limits. But the solution to reducing risk isn't just to cut everyone's limit. heck they could cut risk to zero and just close all the accounts. the accounts only have value when they're open. I have a feeling that the credit card companies actually have no freaking idea whatsoever what the relative risk is on each cardholder. and they are going to get .creamed because of it. i.m not sure risk is knowable in the current environment.

You just answered your own question. You are 1 of millions of people who have credit cards, of course they use mathematical models to predict risk. Credit card companies don't set your limit based on your assets they don't know your financial situation. Credit card default is happening and will continue to worsen so the credit card companies are cutting risk.

If credit card lends had to ask customers to submit personal financial statements for analysts to review, then cost of credit would be much greater.

It's much more cost effective to use computerized models.

Get ready for the next bubble to burst. The credit card industry is going down.

I don't think so. Credit cards are one of the few financial industries that price to risk. If you have bad credit they charge you 25% interest not 7. I think they are going to take a hit but not to the extreme that you are talking about.

You got that right. A typical credit card company - like MBNA, for example - charges an average rate of about 18% on its cards (including the low-rate teaser cards with the higher rate non-teaser cards). In a typical cycle they charge off about 5%, operating costs are about 3% of balances and funding around 4%. So, you get to a pre-tax profit of 6%. Lever that up 5x and you get a pre-tax ROE of 30%, or about 20% after tax. Not bad.

Now ratchet up charge-offs to a previously unheard-of 11% (it could happen, but it's unlikely - I think right now we're at 7.5%-ish) and the card company's still breaking even. Even higher charge-offs and the company's losing money but not enough to put it under. My point is that the card companies are going to suffer - a lot - but unless we have The Great Depression II, they won't go BK. There's an awful lot of cushion in the margin.

This is true, but I do have a suggestion. I think the (purportedly cost effective) "model" is appropriate for a certain level of unsecured credit - maybe, $15K or less (you pick the number). BUT... I think it's ridiculous to offer folks $20K+ of unsecured credit solely on the basis of credit scores and a credit application in which nothing's checked but a credit report. That just seems patently reckless.

My suggestion would be to pick a number beneath which the credit score/application model is going to be used - $15K-$20K, or whatever - and for amounts over that limit, require a full credit application with tax returns, pay stubs, etc. - just what a small bank would do if you wanted an unsecured loan of the same kind.

I have two personal credit cards and two business credit cards, none of which I carry balances on. The two personal credit cards have credit limits of $43,800 and $21,500 (why the disparity I have no idea - and they're both with Chase!). The two business credit cards have limits of $12,000 and $48,000 (again, why the disparity I have no idea - and I've never even charged anything on the $48K limit card.) In my view, despite the fact that my FICO is 800-ish, this is absurd. These companies - Chase and AmEx - should not be handing out unsecured credit in $20K+ amounts to folks like me that haven't filled out a "proper" credit application. Now, I'm a good credit. But, frankly, they don't have enough information to know that. Which is why they're going to be eating a shitpile of charge-offs over the next couple of years.

The rising economic tide of the previous decade hid a lot of swimsuit-less folks out there. Now that the tide's going out we're seeing a lot of unpleasant-looking genitalia.

Credit card issuers are as stupid as the OP contends. Not becuase they (wisely) reduced the credit limit on the B&N card but because the other company lent $50K, unsecured, at an interest rate of ZERO. Morons, even if they have some model that forecasts a profit once the introductory teaser rate is replaced by a new rate.

For the OP, you can still buy the same amount of stuff with the BN card and get your rewards, you just have to pay it off, say, every week.

jonnycsd

Yo miss thepoint on the0 %. Credit card issuers need to maintain an average credit score to both secure and reserve their debts. By bring 50 K on at 0 percent it allows them to lend out 100 k at 22%. This is called a Bar bell principal. There is more too this than meets the eye.