One of the cardinal rules of responsible credit card usage is to apply for only as much credit as you need. A sizable group of consumers take a different approach: Apply for as much credit as you can get.
An oft-cited rule of responsible credit card usage says apply for only as much credit as you need. Some consumers take a different approach: Apply for as much credit as you can get, they say.
This group of mavericks believes that they can benefit — even profit — by turning the tables on conventional wisdom and acquiring credit limits that far exceed what they need. For some of them, that means having access to credit several times higher than their annual incomes.
On personal finance blogs and online forums devoted to credit card usage, it is not rare to come across claims of credit limits in excess of half a million dollars, spread across multiple credit cards. These are not boasts by eager shoppers looking to snap up big boats and companion summer cottages. For the most part, these are financially wise consumers who, for one reason or another, find comfort in their big limits.
4 Must-know credit terms
- Credit limit is the maximum amount of credit available to you on a credit card. This amount should appear on your monthly statement.
- Total credit limit is the sum total of all limits on all of your credit cards. You can calculate this yourself, or you should be able to find the number on your credit report.
- Utilization rate is the balance due on a credit card as a percentage of the credit limit. For example, someone who owes $2,000 on a card with a $10,000 limit has a utilization rate of 20 percent. Credit counselors recommend you never exceed 50 percent usage on any single card, and 35 percent usage on all cards combined. Raising your credit limit lowers your utilization rate without lowering your debt.
- Over-the-limit fees are what many, but not all, credit card companies will charge if your credit charges exceed your limit.
Peggy L. of Arizona (the consumers interviewed for this article asked CreditCards.com to withhold their last names for privacy reasons) says she once collected credit cards “the way some people collect stamps.” At its height, her collection numbered 36 active cards. She has now slimmed down to an even dozen, of which she uses only three or four regularly.
Thirty-six credit cards offer a lot of temptation, but Peggy never intended to encourage random acts of spending. Rather, she appreciates the sense of security afforded by her credit cards and their escalating limits.
The credit limit on her 12 cards has grown to $252,000. Although she rarely carries a balance, and therefore is not a particularly profitable customer, she continues to receive credit limit boosts and offers of fresh credit. She recently closed a US Airways MasterCard account, then changed her mind. Her account was reactivated right away, and her credit limit was bumped up from $5,000 to $31,000. Peggy’s other cards include:
• American Airlines MasterCard ($32,000 limit)
• WaMu Visa ($30,000 limit)
• Bank of America Elite Rewards Visa ($25,000 limit)
• Hawaiian Airlines Visa ($20,400 limit)
Her credit limits grew slowly over the years, and Peggy maintains a credit score in excess of 800. When she is pressed for cash, Peggy taps her home equity line of credit. She never takes a cash advance on a credit card unless it is a 0 percent APR offer, which she can then turn into an interest-earning CD.
Peggy’s principal financial benefit from credit card usage comes in the form of travel rewards, as her card choices suggest. It is precisely because of her travel habits that she values having high credit limits. “If I was stranded somewhere,” she says, “I could charge away on my credit cards, getting all the cash I needed from an ATM.” She equates the feeling to carrying a cell phone “with coverage everywhere coverage is available.”
Making money with credit
Chris P. of Chicago currently has 26 credit cards and a total credit limit in excess of $250,000. Like Peggy, Chris is a responsible spender and bill payer, but his objective is quite different. Chris is a fan of credit card arbitrage.
“The game I play is to apply for credit cards that will make me money, either by offering a better cash back deal than my existing stable of cards or by offering a good balance transfer deal.”
Chris’s “game” currently nets him about $4,000 profit per year — $1,500 from cash back rewards and another $2,500 earned in interest on cash advances with 0 percent APRs.
Chris is not motivated by a desire simply to increase his credit limits. The increases he has received over the years are more of a byproduct to his efforts. “I’ve never asked for a credit limit increase on an existing card,” he says, although his limits sometimes are increased without asking. “And I’ve never applied for a card merely to increase my available credit.”
From time to time, lenders do close accounts on Chris due to inactivity, to which he responds, “So be it. I refuse to make charges on a card merely to keep it open.”
On the downside, Chris acknowledges that his credit card game has adversely affected his credit score, which has fallen from the mid to high 700s to the mid 600s. Chris understands the system well enough to know the reasons for this decline, which include:
• A high ratio of used credit (debt) to credit limits (utilization rate). Though most of this used credit is in the form of 0 percent advances and favorable balance transfers, it nevertheless constitutes debt.
• A high number of accounts with existing balances. Again, this is a result of his “cash back and balance transfer game.”
• A high number of inquiries from creditors on his credit report. This is a direct result of applying for a lot of cards.
• A large number of relatively new accounts.
Chris knows that he has been turned down for new cards due to his high credit limits. He also understands that his current credit score could prevent him from obtaining a low mortgage rate. For now, though, he feels that he is benefiting financially from his credit-juggling act.
Marcus M. of San Diego has faced his demons, and found redemption. “I was a perpetual revolver,” he says. “My utilization rate was out of hand.”
Marcus couldn’t understand why his credit score wouldn’t rise above the 600s despite the fact that he never missed payments on his credit cards. When Chase jacked his rate to 29.99 percent two years ago, despite his perfect payment record, he decided to take action. Marcus transferred the balance on that Chase card to a 0 percent APR card, and then he hooked up with some savvy credit card gamers at an online forum where, as he puts it, “I found religion.”
Though he thought of himself as a responsible card user, Marcus did carry balances on his cards. He discovered, however, that he was using about 65 percent of the available credit on all of his cards. When credit card companies see such a high utilization rate, they see high risk. And when that happens, they make your credit score suffer.
Since this revelation Marcus says he has “been on a mission.” To reduce his utilization rate, he has added $160,000 to his credit limit by adding 10 new credit cards to his collection. Just as importantly, he paid off his balances. He pitched his Chase card into his sock drawer, where he keeps his other unused (but active) cards.
“For the first time in my life,” Marcus boasts, “I am no longer enriching the credit card companies. Instead, they are giving me short-term interest-free loans.” With his high credit limit and low debt, Marcus feels more financially secure than ever. “I am now a better risk, I don’t get turned down for new cards and I receive the best rates and generous limits.”
One man’s rules for adding credit
It’s not what traditional credit counselors preach, but Marcus M. of San Diego has developed some credit guidelines that he finds both responsible and profitable:
- Get credit when you can. Don’t wait until you need it. When you most need credit, your credit report will show a reduced amount of available credit. That means you will appear to be a greater risk, and thus you will be less likely to get additional credit. On the contrary, when you don’t need credit, and therefore aren’t using it, creditors will see you as a better risk. That’s when you want to get more credit.
- Higher limits beget higher limits. When everything else on your credit report remains the same, a higher credit limit can have the effect of reducing your utilization rate. Creditors will translate this to mean that you are a lower risk and are then happy to reward you with even more credit.
The risky side of the business
If you have the self-discipline to refrain from excessive spending and the knowledge to understand how your credit habits are being assessed by the credit bureaus, a high-limit lifestyle can be beneficial. However, there is potentially a very different outcome for those with different temperaments. Are you someone for whom the prospect of having $250,000 in available credit triggers thoughts of long, expensive vacations or nonstop shopping sprees? If so, you may want to follow conventional advise and keep a lid on your credit limits.
David Jones, current president of the Association of Independent Consumer Credit Counseling Agencies, has seen many people who have paid a high price pursuing extreme credit limits. “It’s a vanity thing,” he says. “People like to say ‘my credit limits are higher than your credit limits.'” Jones likens the effort by consumers to raise their credit limits well beyond their credit needs to building a house of cards. “You keep adding cards and the house keeps getting higher and you think you have to keep going on, when what you should do is stop,” Jones says. One card too many, and the whole thing may fall apart.
Jones cautions consumers to view their credit limits the same way creditors do, and that often begins by comparing them to income. Income does not appear on a credit report, but that does not mean that credit bureaus don’t have a good idea about the size of your paycheck.
“The credit bureaus absolutely know what your income is,” says Jones, adding, “they use that information to determine how high your credit limit can grow before you become a credit risk.” How do they know that? As with most loan applications, the lender typically asks for income information, which is often verified before the lender gives approval.
Jones calls attention to one of the problems Chris P. experienced — aggressively trying to boost your credit limit can reduce your credit score. A reduced credit score, in turn, can net you a less-than-favorable mortgage rate or no mortgage at all.
Many of these people, though, would point out that they avoid the aggressive approach. Instead, they let their limits grow gradually, almost automatically. They know intimately how credit scores are calculated and avoid taking actions that could lead to score reductions. Their strategy requires close attention to spending and repayment habits and a good dose of self-discipline, but the benefits (for them, though not necessarily for the credit card companies) can be substantial.