Shouldn't CC apps consider current CCs?

[Anonymous]

I was thinking about this a little bit ago and was trying to consider it from the lens of the lender.  I was over in the approvals section of the forum and someone posted about being approved for a Freedom card with a $23k+ SL.  To me, that just seems like a poor business decision on the part of Chase, or obviously whoever wrote the program to decide on a SL like that.  Very few people are going to use a rotating category card nearly enough to warrant such a limit.  This goes for Discover too (who I haven't seen a $23k SL from, but will gladly hand over $40k-$50k+ limits in time on a card that barely gets used.

We do talk a lot on this forum about larger [current] limits perhaps stimulating larger future SLs due to lenders trying to "compete" for your business, but is it really worth the risk on their end?  When you submit a credit app and your CR is pulled, obviously all of your revolvers can be seen along with their limits, balances, whatever.  If someone has only a few CCs, to me that would suggest that the card being applied for currently would stand a greater chance of getting used more.  Conversely, if the computer "sees" (say) 10+ revolvers already in use currently, do we really think they're going to put a significant spend on a strong 5-figure SL?

I don't know, I just feel like lenders too often take on significantly more risk than the [potential] reward seems to be?

[CAS2019]

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@Anonymous wrote:

I was thinking about this a little bit ago and was trying to consider it from the lens of the lender.  I was over in the approvals section of the forum and someone posted about being approved for a Freedom card with a $23k+ SL.  To me, that just seems like a poor business decision on the part of Chase, or obviously whoever wrote the program to decide on a SL like that.  Very few people are going to use a rotating category card nearly enough to warrant such a limit.  This goes for Discover too (who I haven't seen a $23k SL from, but will gladly hand over $40k-$50k+ limits in time on a card that barely gets used.

We do talk a lot on this forum about larger [current] limits perhaps stimulating larger future SLs due to lenders trying to "compete" for your business, but is it really worth the risk on their end?  When you submit a credit app and your CR is pulled, obviously all of your revolvers can be seen along with their limits, balances, whatever.  If someone has only a few CCs, to me that would suggest that the card being applied for currently would stand a greater chance of getting used more.  Conversely, if the computer "sees" (say) 10+ revolvers already in use currently, do we really think they're going to put a significant spend on a strong 5-figure SL?

I don't know, I just feel like lenders too often take on significantly more risk than the [potential] reward seems to be?

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I actually have thought of this as well.  The only cc holders that I can see actually using those very high limits, would be millionaires.

[Anonymous]

A lot of us have the “More!” mentality here. We get a limit that’s higher than we need or will realistically use, and we still hit the CLI button anyway. I understand that higher limits mean UTI ceases to be an issue, but there are guys here who could put a new AMG Benz on their cards and not cross over 20% UTI. Doesn’t stop them from apping for more cards and trying for CLIs.

It may simply be that lenders get a similar mindset that “more” pays off. To a consumer, the benefit is ants-butt low UTI no matter the spend. To a lender, they will see those astronomical CLs and likely will see their justification in the customer’s reports. Poor money managers rarely have $500k worth of unsecured credit. Because of this, while possibly a poor business choice on one hand, playing into peoples’ desire for ever-more access, they throw huge SLs at vetted applicants for exactly the reason you state - trying to drum up significant spend. Someone who has those types of credit lines across multiple cards likely spends a good chunk of cash on them. Why not try and tempt them into spending it on YOUR card by offering an even higher CL? If they’re going to spend, might as well do it with you.

The lenders know there are quite a few credit-savvy users out there and it stands to reason that those who have huge limits likely know how to use the cards for max benefit while reporting very little at the close of the billing period. It’s also likely that generating those types of limits is either a case of “more more more” or it’s a smart user who understands scoring breakpoints and other intricacies of credit usage, and offering them a big shiny 5-figure SL is a good way to entice them to swipe your card instead of those your competitors have granted, especially with perks and SUBs added on. I don’t doubt that there is psychology at play in there in determining the lenders’ policies. It would be interesting to chat with someone involved in setting those limits...

[Anonymous]

My thoughts...

It’s all a business decision. “If you can’t compete, you don’t compare”. If lender X is willing to hand out high limits, but lender Y isn’t, which company will a borrower go to both in terms of obtaining a card and utilizing a card? To most borrowers, it’s not about limits they will realistically use, but instead the thought that bigger is better. Lenders have to stay competitive. Consumer loyalty is driven by experience; consumers will look to companies that treat them well. High limits = good treatment in many card holder’s eyes.

That said, I’d think the lenders are willing to be competitive with those that have low risk in an attempt to get part of the pie.

[FinStar]

It is not a poor business decision from the FI's perspective.  Most savvy consumers, whether it's those floating around these circles, social media or other channels are usually familiar on how to maximize the most value from the rotating categories assigned to that product.

Lenders tend to evaluate capacity and will assign the most appropriate limit based on a lot of complex algorithms and sophisticated AI.  So, in your example, the Freedom CC isn't just for category spend.  There's also the promotional or introductory APR piece that is also factored into the equation, these are offered periodically to those who are eligible over the life of the product.  Potentially, the FI is also banking on the consumer to carry a large balance for X amount of time (beyond the intro period).  One also has to think oh how many millions of accounts are on the books, and to that end, how many individuals are carrying balances month to month + finance charges. 

Also, just because the lender approved someone with ~$23K out of the gate, it doesn't mean that they can't reduce their exposure across the board during any periodic account reviews if such a profile deteriorates or an account has prolonged non-usage.  Plus, anecdotal evidence has shown that any downturn in the economy or shifts in lending policies will definitely have an effect with a variety of those CLs.   So, AmEx, Capital One, Discover, BoA, Chase, etc., have been known to do this.

[Anonymous]

But we're talking $23k on a rotating category card.  I'd like to PM the person that was approved for that card and ask them what they feel their typical monthly spend will be on it.  I'd be shocked if it was anywhere near 10% of that CL. 

I have two rotating category cards (Freedom and Discover) and have never spent more than maybe $500-$900 in a cycle on either one and that's if the category suits my spend that quarter.  There are quarters where I'll go spending next to nothing.  Last year I put > $40k on CCs, so my spend is pretty decent relative to what those rotating category cards see.  That being said, I can't see how issuing a $23k+ SL on one of those cards can possibly be a sound business decision unless it's to someone that has next to no revolvers on their CR and the lender is banking on the cardholder using the card as a daily driver or something.  Even if that's the case, why not start them with a $5k-$10k SL and if significant spend is seen in the first few cycles, give an auto-bump up to $23k (or whatever)? 

Obviously the lender(s) in these situations don't view the additional "risk" as being significant enough to matter, but I can't see how they can possibly deem the potential "reward" to outweigh that.  Maybe 1 on 100 people actually use more than 10% of one of these limits in a cycle?  Does 1 in 100 (or more) end up defaulting on their account.  If so, at what cost? 

[Anonymous]

Throwing in a number of high credit line approvals into a portfolio along with riskier lower credit line approvals seems like a good way to make debt risk for that portfolio look better. 

There has to be some sort of reward that comes out of it and the only thing I can think of is appeasing investors. Say 40% of your customers are subprime and thus very risky but they only make up 5% of the outstanding credit lines issued because you have 10% of your customers at superprime with 70% of the total credit limits. This seems like a logical way to justify letting in riskier customers at much higher interest rates. 

Smoke and mirrors but when you’re publicly traded, the risk has to be acceptable across the board so say you have buckets of portfolios that all have balanced out average risk which is largely controlled with interest rates and credit limits, you can shift accounts across portfolios to keep the average risk in each the same across the board, increasing and decreasing credit limits as needed to compensate for fluctuations. 

I don’t know, it seems logical to me, but it’s 4AM and I don’t know how much sleep I got during my crash nap so I’m sure I did a terrible job of getting my point across, sorry. 😴 

[Anonymous]

I suppose your justification from the big picture standpoint can be made.  I was looking at it more from an individual account by account basis, where it just seems silly at times.

[Anonymous]

A credit union might be doing things on a truly individual level more often than not but big banks don’t care about the individual level at all, it’s all about the best way to squeeze the most profit out of every customer and find that balance between risk and profit. 

They honestly aren’t even that concerned with customer retention as long as the churn doesn’t cost them money from bonus chasing. 

[CAS2019]

This is a topic that is of interest to me.  I now have a better picture of the “business” side of things—some of which I wouldn’t have thought of.   I have such an innate fear of cc debt, understanding the entire picture is very helpful.  It won’t change the way I do things, but it does put everything in perspective.