How Banks Justify its Initial CL and CLI's?

[DI]

How does banks justify giving CLI's overtime, rather than giving a big initial CL if the income is still the same?  If the bank doesn't trust one with a $5000 initial CL, how come overtime they raise the CL to $5000 from $1000?

For example; a bank says your initial CL will be $1000 due to your income, but six months later they raise the limit to $5000 without a change of income.

[MattH]

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@DI wrote:

How does banks justify giving CLI's overtime, rather than giving a big initial CL if the income is still the same?  If the bank doesn't trust one with a $5000 initial CL, how come overtime they raise the CL to $5000 from $1000?

For example; a bank says your initial CL will be $1000 due to your income, but six months later they raise the limit to $5000 without a change of income.

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Probably they raise the limit over time as they learn more about you as a customer from your activity patterns.  The longer they have had you as a customer, the more their computers know about you.

[Watchmann]

That's the way life works.  Parents give their kids more and more responsibility as they get comfortable with how the kids handle it.  Same is true with employers ..... the better an employee does, the more responsibility (and money) the employer gives them.  So it is with credit, as a grantor gets comfortable that you won't renege on paying them back they'll allow you a greater limit.  The methodology has come under strain the last few years as people have flaked on their financial responsibilities.  It used to be a golden rule that mortgages were ultra safe as history had shown that homeowners would move heaven and earth to make the mortgage payment.  That is no longer the case, and that is one of the reasons CL's across the board are being slashed or taken away.

[MattH]

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@Watchmann wrote:
That's the way life works.  Parents give their kids more and more responsibility as they get comfortable with how the kids handle it.  Same is true with employers ..... the better an employee does, the more responsibility (and money) the employer gives them.  So it is with credit, as a grantor gets comfortable that you won't renege on paying them back they'll allow you a greater limit.  The methodology has come under strain the last few years as people have flaked on their financial responsibilities.  It used to be a golden rule that mortgages were ultra safe as history had shown that homeowners would move heaven and earth to make the mortgage payment.  That is no longer the case, and that is one of the reasons CL's across the board are being slashed or taken away.

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My wife and I still would move heaven and earth to make the mortgage payment if things got tight. Actually we could pay the full balance tomorrow but won't for two reasons: (1) cash flow flexibility and (2) we expect when the economy finally recovers from this crash we're gonna see high inflation for a while and then a fixed-rate loan will be advantageous for us.

[Anonymous]

As time passes, I have no doubt you will see many more decreases in CL's and certainly the stopping of automatic CLI's, as frankly they have put the Credit Card Industry in a precarious position.

It seems that most bankers feel the Credit Card bubble will be the next to burst.

Times like this it is just best to stay with wise spending habits, live within your means and reserve credit purchases for your serious needs.

[Anonymous]

Both the decision to issue credit and the credit line granted are based on the probability of loss on the account. 

For example, the bank using data (internal systems, FICO scores, etc.) to calculate the probability of loss GIVEN your income level, payment history, and previous relationship with the bank.  Now, if any of those statistics change, the probability of loss changes.  With a new account, the bank has no payment relationship with you, so it assesses a baseline threshold for loss, i.e, your initial CL. 

After time, the bank can reassess and, yes, even after 6 months the bank's regression systems may determine that the probability of loss GIVEN your income level, payment history and previous relationship is sufficiently low to allow a CLI to a certain level.

[Lucid08]

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@Anonymous wrote:

After time, the bank can reassess and, yes, even after 6 months the bank's regression systems may determine that the probability of loss GIVEN your income level, payment history and previous relationship is sufficiently low to allow a CLI to a certain level.

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I think it would be wise to expect that with the recent moves to a variable interest rate, and the associated reassessment of customers profiles, we will see a change in how internal data is interpreted for both CLI considerations, as well as the establishing of an original baseline interest rate + Prime.

[Anonymous]

For the most part tomorrow's considerations will be pretty much the same as today's.

Pay your bills on time - don't carry balances - you will be fine!

The people who are going to have CLD's are going to be those with the excessively high CL's (over $20K). If you have an excessively high CL with a money center bank and are not exercising a good chunk of it you could suffer a CLD. Those banks have to reduce their exposure and it has to come from somewhere. Those accounts are the mostlikely target. Those and the accounts where the cardholder's credit standing has slipped.