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January 6, 2007 2:41 PM

Why would I need $80,000 in credit?

I got in to a conversation with a coworker the other day about credit. I believe it stared with the notion of using credit cards sparingly to build up a credit history. At any rate, during the course of the conversation he mentioned he has a credit limit of about eighty grand spread over several cards.

I have one credit card with less than two thousand dollars credit available to me. While this is a result of a lack of credit history (I avoided cards as much as possible until I got screwed on my auto loan), it got me thinking. I put about two hundred dollars on my card every month and pay the balance off in full. I really only use it for business expenses and one or two purchases a month to build up my credit history. I can't imagine ever needing a credit limit that's almost 50% more than my yearly salary.

So, why would anyone need a huge credit limit? Is this just a cause (or effect) of the spend-more-than-you-make society nowadays? Is there a practical use for it? Is it possible to get low enough rates on credit cards that it would be more beneficial to use them than, say, taking out a loan from a bank?

posted by backseatpilot to work & money (27 comments total)

Having 80k in unsecured debt on a middle-range salary is a bad thing. Having 80k in available credit, though, is fine. It actually helps your credit score a great deal, and of course keeps your options open. Just don't use it and it's a good thing.
posted by muddylemon at 2:56 PM on January 6, 2007

*I'm not a financial analyst or credit advisor.* However, after some credit mistakes in college I managed to get my credit back up to a "good" rating and then all the card offers came. I just started applying for the fun of it and ended up with a a nice 5 digit figure of credit limit. There's no real reason for all that. If you need a real bank loan good credit plus a job (and maybe a suit) will get you one. Usually one that's easier to manage and pay than a host of credit cards.

Also, I subscribe to a credit monitoring service and the little "what if" simulator shows an increase in my credit score simply by cancelling a few cards--even though they have a zero balance. I think this lowers your risk factor if you have less potential to go into debt. Bankruptcy Risk Score is another, more hidden score that has yet to become publicly available the regular credit score. This "hidden" score is probably a good reason to not open up too many lines of credit in case you're looking to do something like buy a house.
posted by Burhanistan at 2:57 PM on January 6, 2007

One of the factors for a credit score is utilization, the percentage of your credit line that you are using. You want to keep it low.
posted by smackfu at 2:58 PM on January 6, 2007

(publicly available like the regular credit score)
posted by Burhanistan at 2:59 PM on January 6, 2007

I'm no expert here, but your current credit limit has nothing to do with practicality. You'd never go buy a house outright with your $150k credit limit that you've so carefully created with Visa, MasterCard, and Discover. It's all about how much other people want to trust you with their money. So when it's time to buy your first house and the lender sees that the rest of the world is willing to trust you with $4000 they might not be as excited about loaning you $150K as they would be if the rest of the world were willing to loan you 80K.
Really, it all boils down to your credit score. There are lots of resources for finding out what goes into one. I've had a good experience with truecredit.com (there are lots of others too) to find my score and learn all about what why it is what it is.
Do a little googling, there are a million billion people that love to talk about this stuff.
posted by sauris at 3:02 PM on January 6, 2007

Having some cushion in your credit limit is good for unexpected emergencies, like large uninsured medical bills, for example.
posted by monju_bosatsu at 3:11 PM on January 6, 2007

I have a friend whose hobby is pimping out fast cars so that they're not just fast, they're STUPID fast. The guy also has assloads of cash. (And a beautiful wife, and a nice house, and is retired at 45, but we won't go there.)

He'll go buy a new fast car using a credit card that has an absurdly high limit, and then pay the credit card off the same month. He gets a % of the purchase price of the car back in cash thanks to his credit card (which tickles his funny bone), and doesn't pay any interest on it... and it's easier than carrying a suitcase of $100's in.

Then he pimps it out, spins it for twice what he paid for it, and buys another one. :-P
posted by SpecialK at 3:15 PM on January 6, 2007

There are some advantages to what your friend is doing. Keeping cards for a long time is usually a plus for your credit report, so he may feel like he doesn't want to close any accounts that he has a good history with. A small part of the score is also figured from how close you are to your credit limit. It's better to owe 2,999 on a 10,000 card then 2,999 on a 3,000 card.

Maybe he charges all his expenses to a credit card to max out the rewards each year, then pays them off monthly. He'd need to have a large limit so that he doesn't go over if an emergency crops up.

IANAFA, but you could probably stand to have a second credit card. You don't want to wait and then have a lot of "new credit" at a time when you may also be trying to get a house or new car loan.

This brochure is pretty helpful in explaining how FICO scores work.
posted by saffry at 3:51 PM on January 6, 2007

I really think that most credit cards work on the "give you enough rope to hang yourself" principle these days. AFAICT, there's no correlation between card use and limit.

Some years ago, I was undisciplined with my credit card, and kept approaching a limit that kept rising, as if to encourage me to spend more. OK, it's not hard to understand the logic behind that. "He's near his limit, he might stop spending, and he's never too late with a payment to be a bad risk, so let him spend even more."

Currently, my wife and I have one credit-card account between us. We barely use it at all, and never carry a balance. The issuer just sent us some of those credit-card checks—these being good for up to $37,800, with 3.99% for the life of the debt. All I can guess is that some algorithm deep in the bowels of the issuer's computer noticed that we're not using the card, and figured "maybe a higher balance will get them to spend more." And that is a favorable rate—I could buy a nice car for that, and probably not get a better interest rate elsewhere—but the credit-card companies will jack your interest to 24% or more if you look at your bill crosseyed. Not worth the risk.
posted by adamrice at 4:06 PM on January 6, 2007

Nthing everyone else. i've probably got about as much as backseatpilot's friend.

as a stupid hobby, i wait for the card companies to send me a 0% balance transfer offer, then write myself a check for 20K and put it in ingdirect for a year or whatever the 0% term is. if you screw up and forget to pay your bill, its over, but with checkfree/billpayer services its pretty much impossible to forget to pay your bill.

anyway, with interest rates climbing, the days of the 0% balance transfer are probably numbered. i was very surprised to get one just the other day.

the negative side of this approach is that as your outstanding debt goes up, your credit score goes down. also if you want to put a query freeze on your credit report, you may not get any/as many balance transfer offers. another negative is that you end up with a whole bunch of credit cards that you have to manage, but with all the bank consolidation going on i've found that i've ended up with just a few accounts with large credit lines.
posted by joeblough at 4:10 PM on January 6, 2007

Why would I need $80,000 in credit?

My mother had a heart attack in New Caledonia a few years back. It would have cost between $40,000 and $50,000 to fly her off the island -- as it was, between flying relatives in and arranging housing for everyone, about $25,000 was spent all told.

It's nice to have that kind of money available in a universally accepted form.
posted by tkolar at 4:17 PM on January 6, 2007

tkolar's answer was going to be mine as well - medical emergencies can get crazy expensive, and it's nice to be able to focus on your family when they need you, or even just to be able to physically get to your family, rather than focusing on scraping the cash together right that second. Hell, even veterinary emergencies can add up if surgeries or expensive medications are involved.

As another thought, I seem to recall that when I was in college, my parents paid my tuition via credit card for the cash kickback. They filled up my campus spending account for the semester at the same time, including textbook money, so all told that must have required a ton of available credit just on that one card, forgetting about any others.
posted by Stacey at 4:45 PM on January 6, 2007

I bought a car last week on my credit card. I have the money to buy the car, but by putting it on my credit card first, I got 30k frequent flyer miles. That's why.
posted by johngumbo at 5:28 PM on January 6, 2007

i know a fellow who used his low interest credit cards to pay off rental property mortgages at a lower interest rate than his mortgage loan. he had several cards with very high limits (40k-80k) @ 2-3% and saved thousands paying towards that low interest debt than having his debt in a higher interest (5%-7%) mortgage.
posted by farmersckn at 5:43 PM on January 6, 2007

That is the first time I've ever heard of a credit card whose interest rate was lower than a mortgage (a traditoinally very-low-interest loan). Usually the interest on a credit card is between 9 and 19%.
posted by breath at 7:15 PM on January 6, 2007

How do people buy cars with credit cards? Everywhere I go I can only use $1500 to $2000 at most on credit. They say it's by law.
posted by lpctstr; at 7:53 PM on January 6, 2007

All I know about this subject is, when I was renting, the bank gave me a credit card with a $2,000 limit. Then (no change in salary) I got a mortgage for $400,000 and they gave me a credit card with a $20,000 limit on it. I guess the philosophy is, if I'm trustworthy enough for them to approve the mortgage, I'm trustworthy enough for the extra credit?

Or perhaps just "we know where you live"?
posted by AmbroseChapel at 8:09 PM on January 6, 2007

AmbroseChapel: I suspect it's also about your asset base, not just trust. Money in a bank account disappears more quickly than a house, against which they could put a lien.

I put everything on credit cards because my card gives me 2% cash back and it means I push payments back three weeks. I'm using their money for free for three weeks and getting paid 2%. I pay in full every month and I don't run up more credit than I could pay off if I lost my job.

As for credit, it's good to have it but to avoid using it. If you ever lost your job and exhausted your emergency savings, you could turn to your credit cards or a line of credit. A medical emergency, family crisis, death that resulted in bank accounts being frozen, or something like that might also be reason for credit of such proportions. Also, even if you had $50k in the bank, it would make sense to put a $50k round-the-world vacation on your credit cards, in case you need to do chargebacks or the airline goes bankrupt or what-have-you. And sometimes you need a credit card to pay for things, like hotel reservations.
posted by acoutu at 8:46 PM on January 6, 2007

High credit lines are great for emergencies, and are basically decorative otherwise.

I strongly suggest that you get enough credit to buy two last-minute first-class tickets to wherever your family members and close friends live, with a few thousand left over for hotel and food.

I know you probably fly coach, but if somebody calls and says "___ is dying.", you really want to be able to go to the airport, get on the first plane with your SO, and not have to worry to wait for cheaper airfare, or a bank transfer.
posted by Tacos Are Pretty Great at 10:54 PM on January 6, 2007

LPCTSTR -- there might be a law to that effect where you live, but probably not: chances are the dealers are just lying to you.

They don't like to pay the credit card fee, and they do want you to borrow money from them and not from your card issuer, and so they refuse to accept cards for anything else other than a small down-payments.
posted by MattD at 6:24 AM on January 7, 2007

Yeah, remember that accepting a credit card for a car lowers the amount the dealer receives by 2-3%. If you are driving a hard bargain, that might well eat up their entire profit. If they let you use a credit card, then, odds are good you could have got a much better price than you did.
posted by kindall at 9:23 AM on January 7, 2007

The key to "buying stuff on my card and getting miles" being a profitable scheme is to pay the bill in full every month without fail. Come to think of it, this is also a great way to get and maintain a great credit rating. It also makes it more likely that you will receive unsolicited offers of increased credit line. After all, as others have pointed out, they want you to pay interest.

But yes, one never knows when a big line of credit might be handy for "oh my god the heater just died" or "my brother's just been arrested in Iowa" or a cross-country move or whatever other kind of emergency that money can help fix.
posted by ilsa at 2:01 PM on January 7, 2007

It's interesting to see some of the differences in the way different countries rate credit. In Australia if you go for a home loan while holding an $80,000 credit card, they would assume you were going to max it out tomorrow. Then your income would need to be able to cover the minimum payments on that $80k plus your loan amount. As such it hurts your ability to get a loan, rather than "proving" you are responsible.

AmbroseChapel: As acoutu said, if you don't pay your card off now you have a house they can take.
posted by markr at 2:18 PM on January 7, 2007

markr, where can I find out things like the treatment of credit cards in Australia? As an Australian, all the personal finance credit magic I hear is far too much about FICO scores and hence irrelevant.

sorry, would have emailed but you don't have one listed
posted by jacalata at 7:30 PM on January 7, 2007

jacalata, I don't really know much about it I'm afraid. The bit above I picked up when going for my own home loan (that is, they assumed I would have to pay the minimum payment on the full credit card amount each month, despite the fact that its current balance was zero).

My understanding is that in Australia people don't have "credit ratings". Instead potential lenders can obtain a history of any previous loans you have defaulted on and the like, and they make their own assessment based on that (and your income and assets obviously).

This page at the Queensland government fair trading website seems to back this up.
posted by markr at 9:22 PM on January 7, 2007

thanks, that makes sense :)
posted by jacalata at 5:00 AM on January 8, 2007

In case you have to hire the A-Team at a moment's notice...
posted by niteHawk at 7:39 AM on January 8, 2007 [1 favorite]