Why is your credit limit determined by income instead of networth?

[techcrium]

If you have $5 million bucks and just quit your job, and on your credit card application, you put $0 as income, the issuers will flat out deny your application...

Even though you can easily pay off the debt.

Isn't that flawed?

[redbeard]

Don't put 0 as income. If you truly have 5M bucks in the bank, you can easily get 1% interest on that, which is $50K a year in income.

You should be able to get more then 1%.

Is this a real life example?


Dan

[bdhu2001]

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@techcrium wrote:

If you have $5 million bucks and just quit your job, and on your credit card application, you put $0 as income, the issuers will flat out deny your application...

Even though you can easily pay off the debt.

Isn't that flawed?

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Okay.  Unless your money is sitting in a box or safe deposit box, you have income.  Prior to buying a new house, I have 500K and my monthly income from that was $1300 per month (the amount of time funds would last if I drew a monthly amount for 30 years).  

Reassess your situation and figure out your monthly draw.  Then starting drawing it. I would draw on the amount of 1/2 the funds and use the rest for business, a house or whatever reason you decided to sit on 5 mil.

As far a your queston on whether or not it's flawed, no.  Credit is based on how you handle credit and not just ability to pay.  Since returns from investments and income are considered income, most people wouldn't say they have $0 income if they have $5 mil.

[Thomas_Thumb]

Dividends from stocks and interest from bonds, CDs, savings/checking accounts is valid income to report. 

However, if you have gain/loss on paper only, you cannot claim it. 

[techcrium]

Let's assume it is fully invested in stocks that pay no dividends....

For example Berskhire Hathaway, Google, Amazon, Netflix, etc

You have 5 million bucks in stocks, 0 income, and credit card issuers will not issue you a single card?

Sounsd like a flaw

[iv]

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@techcrium wrote:

Let's assume it is fully invested in stocks that pay no dividends....

For example Berskhire Hathaway, Google, Amazon, Netflix, etc

You have 5 million bucks in stocks, 0 income, and credit card issuers will not issue you a single card?

Sounsd like a flaw

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If you have no income, and all your assets are tied up in non-dividend, non-interest-paying investments...  then what are you buying food with?

If you are liquididating a fraction of your holdings regularly to pay expenses... you have income.  (Yes, it may not be taxable income, if you are offsetting losses.)

If you aren't... then what are you planning to pay the credit card bill with?

Regardless... your manufactured scenario isn't realistic - you will in practice need to have some source of income for basic living expenses. Not to mention that the credit card arm of an institution you have $5M invested with will be more than happy to issue you a card.

[techcrium]

You are saying if I liquidate my investments, that is counted as income?

So if I sell $200,000 worth of stocks and move it over to my checkings account this December, when I apply for credit cards, I can basically put that I had $200,000 in income this year??

[olehammer]

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@techcrium wrote:

You are saying if I liquidate my investments, that is counted as income?

So if I sell $200,000 worth of stocks and move it over to my checkings account this December, when I apply for credit cards, I can basically put that I had $200,000 in income this year??

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No, but your gains on those withdrawals would be considered income. 

Side note - do you have any examples of someone with $5MM in liquid assets not being able to secure a decent limit credit card?  WIthout that your hypothetical scenario doesn't really hold water.

[NRB525]

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@techcrium wrote:

If you have $5 million bucks and just quit your job, and on your credit card application, you put $0 as income, the issuers will flat out deny your application...

Even though you can easily pay off the debt.

Isn't that flawed?

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American Express? On the American Express applications, they ask for net worth indicators also. Income may be a factor, but wealth is also considered.

And, worst case scenario, open a secured credit card with the likes of SDFCU (no credit check, no income verification) and put the amount you want to be able to charge in the savings account. Likely up to $5k is allowed. There's your new credit card limit.

[Aahz]

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@techcrium wrote:

If you have $5 million bucks and just quit your job, and on your credit card application, you put $0 as income, the issuers will flat out deny your application...

Even though you can easily pay off the debt.

Isn't that flawed?

---

If there were no recourse after an auto-denial for a $0 income then the system would be flawed.  However, the current system does have recourse after the denial.  You simply call the reconsideration line and explain the situation.  Once you prove the existence of your $5 million in cash they'll be happy to issue you a card.