$20,000 Credit Cards for Profit and Condemnation
The world of credit never stops amazing me. When I first started to learn about the effect $20000 credit cards were having on unsuspecting borrowers, I fell down (figuratively). It’s not that fact that card companies bait their offerings with gifts and peddle them to university kids that bothered me. Most of these cards are signed with a much lower limit. It’s once you have the card that things change.
A father of a close friend of mine had a $20K credit card (we’ll call him Fred). Fred was in his fifties and was a responsible adult. Due to his relocation to this country he got into a lower paying industry and was making no more than 2000 net a month. His rent ate up about half of that, and he was only really left with a few hundred dollars at the end of the month after all his expenses. So you could image my surprise when I found out that he had a credit card for 20,000. My first question was: How in the world did a person with this financial profile get a card with a limit like this? And that is the key, he didn’t – at least initially.
The credit card he qualified for orgionally had a $5000 limit. This makes much more sense as he flys home every year or two so a limit like that would enable him to charge what he need to and he would pay it off right away with the money he had save for the trip. He even had a credit card with a points system so he could take advantage of is few and far between major transactions.
So how did he get a card limit of $20,000 then? Lenders know that they increase their profits if they increase the limits of their borrowers. They don’t do it all at once because they know the psychology behind credit. Many people would not be comfortable with a drastic increase in their limit of $15,000 dollars, but incremental increases of $2,500 or $5,000 would be less intimidating. The borrower may not take every offer but if you offer increase because “You are a great customer” (or something to that effect), through simple marketing of repetition and giving the customer a role to live up to, many will take the limit often for a rainy day.
Now that we have an idea of how these limits are placed, how did he qualify in the first place. That goes to the internal marketing and risk model, translated: how much money the card company wants to make and how much they are willing to loose. More on $20,000 credit cards (and other higher limit lending instruments) tomorrow.
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