Expense Rises to Credit Card Limit! Young Card Holders Beware.

Bloomberg Businessweek January 27, 2020 pp24-26. “Resetting The Debt Trap”. “Credit card companies are quietly raising limits on subprime and ‘near-prime’ borrowers”

In the ongoing pursuit of more profit, banks are increasing credit limits on users likely to convert the increase into debt. Credit limits averaged just more than $25K after the real estate crash in 2008 but have steadily increased to $31K now. American financial regulations allow automatic credit increases if calculations suggest a borrower can manage the new minimum payment which typically is $25 per $1250 debt. As an example, If a user held 80% of the limit in debt then their monthly minimum would be $31,000*0.8*$25/$1250=$496. If the bank automatically raises the limit, the borrower upon being notified may "assume they wouldn't get limit increases if their banks didn't think they could handle them". In this example, if the limit is raised to $36,000 and the user builds again to 80% debt, the monthly revenue eventually increases from $496/month to $576/month. These credit limit increases are strategically being targeted to subprime and near-prime borrowers who are by definition those who do not qualify for conventional loans or have trouble meeting repayment schedules. Surprisingly, “for consumers who carry balance on the cards, ‘nearly 100% of an increase in credit limits eventually becomes an increase in debts’”.

Overall, outstanding credit card debt has reached $880 billion/year and card issuers are racking in $179 billion in interest and fees. Fees include those charged the consumer and merchants. Consumers paying fees on cash advances and late penalties and merchants paying interchange fees for each accepted transaction.

90 days past due credit card debt is expected to reach the highest level since 2010 while delinquencies on home, auto and personal loans are predicted to fall. It is concluded that the youngest borrowers are especially impacted by credit card debt.

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