Why credit limits are hard to get

Discussion in 'Credit Talk' started by ShaleDC, Oct 2, 2003.

  1. ShaleDC

    ShaleDC Well-Known Member

    I understand that everyone here feels like they deserve a $150,000 credit limit on their Cap1 card, however I think it's neccessary to understand WHY you can't get those limits.

    You see, credit card companies have to reserve a certain amount of money in cash, to cover the loss if you default on your debt. Let's say you cary a balance of $1k with a limit of $10k. The credit card co. has to reserve, say $100 in cash to cover your balance, plus another $50 to cover your UNUSED CREDIT LINE (since you might run it up and then default.)

    These reserves are required by the federal government, and vary depending on the credit worthiness of the card holder. A specific formula governs how much they are forced to reserve. People with low credit scores require higher cash reserves than people with high credit scores, since they default at a much higher rate.

    Why does this matter? Well, if the credit card co. is forced to reserve cash to cover its potential losses, that means that it can't invest that money. So, your high credit limt actually costs the card company money, whether you use it or not (though it costs them more if you use it). The lower your credit score, the more they have to reserve and the more it costs them.

    This is why you won't get high credit limits unless you actually use your cards, and earn money for the credit card company.

    *Of course, the company also has to weigh in the risk associated with a default, and how much risk they are willing to assume when they increase your credit limit.
  2. rackt3

    rackt3 Well-Known Member

    Interesting. But I didn't know this applies specifically to credit cards. I do know that banks are required to have reserves as far as their overall cash goes though..
  3. Butch

    Butch Well-Known Member

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