Credit Line Increases

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It’s happening more and more. You receive a letter or an email notifying you that you’ve been pre-approved for an increase in your credit line. But you didn’t ask for an increase; it was just offered to you — out of the blue. What’s going on here?

Well, credit card companies are doing it more and more often. It’s called a PCLI — Proactive Credit Line Increase. The idea is simple. Companies scan their database of active customers and boost the credit lines for a select number of accounts. By increasing the credit line, companies are hoping to entice consumers to add to their credit balance. This, in turn, boosts interest payments on the accounts in question.

It’s a practice that went out of fashion following the financial crisis. At that time, banks were dealing with massive balance sheet issues and brand new regulatory agencies, such as the Consumer Financial Protection Bureau. Instead of increasing consumer credit limits, banks were focused on managing their existing bad loans and working through the new regulatory regime.

But over time, banks have started to dip their collective toe back into the sub-prime and near-prime lending markets. Credit Cards — which offer an average interest rate near 20% per year — are an attractive source of revenue for banks. In 2018, US issuers of credit cards increased the credit lines of 4% of customer accounts in each quarter. That percentage is nearly double the 2% from 2012.

What’s the impact of all these credit line increases? Well, more debt — and a lot of it. As of September 2019, outstanding credit card debt hit a total of $880 billion. That’s a new all-time high.

While the credit line increases may seem like a prize, they often come with a price. Studies have shown that nearly 100% of credit line boosts turn into increases in debt.

And one group of borrowers, in particular, is most vulnerable to the new practice — 18 to 29-year-olds. The number of younger borrowers at least 90 days behind on their payments now stands at the highest level since before the 2008 financial crisis. In addition to credit card debt, many young people also carry high levels of student debt. In both cases, these individuals may be forced to delay — or forgo entirely — starting a family, buying a home, or saving for retirement.

A common misconception among young people is that the credit card issuers would not raise credit limits if they did not think the borrowers were capable of repaying. While card companies DO have a strong incentive in the matter — pushing their customers directly into bankruptcy is not suitable for their business — they’re not legally obliged to consider the long-term debt load. Instead, they’re required by The Credit Card Act of 2009 to determine whether the borrower could pay the minimum payment due if the entire credit line was used.

So, at the end of the day, it’s an old story — beware Greeks bearing gifts. What may seem like mana from heaven could genuinely be just another bill to pay.