credit card limit story

[Raybyrnes]

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.

[davelj]

[quote=Raybyrnes]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. [/quote]

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.

[davelj]

[quote=Raybyrnes]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. [/quote]

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.

[davelj]

[quote=Raybyrnes]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. [/quote]

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.

[davelj]

[quote=Raybyrnes]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. [/quote]

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.

[davelj]

[quote=Raybyrnes]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. [/quote]

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.

[davelj]

[quote=patientlywaiting]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.
[/quote]

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.

[davelj]

[quote=patientlywaiting]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.
[/quote]

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.

[davelj]

[quote=patientlywaiting]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.
[/quote]

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.

[davelj]

[quote=patientlywaiting]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.
[/quote]

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.

[davelj]

[quote=patientlywaiting]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.
[/quote]

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.

[jonnycsd]

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]

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]

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]

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.

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