Credit Card companies lowering limits to below current balances

[Greebo]

This might belong in the ? about Objectivism forum, not sure...

So in the news lately, I'm reading stories about CC companies lowering available credit lines to levels below current balances of some cardholders. I even know a few people to whom this has happened.

The company can then charge you for being "over limit" (after, iirc, a 45 day grace period).

Now if you've ever read the TOS for a CC, basically when you sign the application you give them permission to **** you over any way they like. Rate changes, due date changes, limit changes, etc., all at their discretion.

US Federal law is changing to prohibit this practice in July 2010 - after which limits can't be dropped below current balances.

Two questions come to mind on this:

1) If the CC company allows you to borrow X, then lowers your limit to <X and then fines you for being over that new limit, legally should/does the fact that they earlier allowed you to borrow X *imply* a contract that the limit should be set no lower than X?

2) Under an objective system, would this contract be upheld because you signed on the dotted line?

I am torn on this - on the one hand, if CC says you can borrow 5k with no penalty, and you do, and then they change it to 4k, that they should not be allowed to penalize you for being over limit unless you borrow any more after the limit has been changed.

However, if the terms say they can change limits w/o regard to balance, and you sign on the dotted line, more fool you...

Help me reconcile this seeming conflict?

[JMeganSnow]

Caveat Emptor. Always read contracts. And don't carry a balance on your credit cards.

It's a shitty practice, but it shouldn't be illegal. Some rational company should just go around to the people who got el screwed and say "transfer your balance today for a nominal fee! We promise never to lower your limit below your current balance!"

Edited March 17, 2009 by JMeganSnow

[KendallJ]

Two questions come to mind on this:

1) If the CC company allows you to borrow X, then lowers your limit to <X and then fines you for being over that new limit, legally should/does the fact that they earlier allowed you to borrow X *imply* a contract that the limit should be set no lower than X?

2) Under an objective system, would this contract be upheld because you signed on the dotted line?

My perspective:

1) NO

2) YES

If you give them permission to **** you, then they can't really be said to be ****ing you, just because you don't like it after the fact. I wonder what makes you think that it should be implied that you can continue to hold an unsecured line of credit that you can't pay down in time, when economic conditions change. The whole point is that it's an unsecured line, and the lender ought to get a fair amount of leeway in assessing your ability to pay back the debt. If conditions change, whether through your actions or through the effects in the general economy, then banks ought to be able to change the conditions of the line.

Instead of getting angry at banks for ****ing you, get angry at the government for causing this whole damn mess in the first place.

It's a shitty practice,

I don't even think it's that. If it as retroactive, maybe. But if you knew all along they could change it (or should have) then you only have yourself to blame for using a revolving line of credit more like a loan.

[Greebo]

If you give them permission to **** you, then they can't really be said to be ****ing you, just because you don't like it after the fact.

I do get that.

I wonder what makes you think that it should be implied that you can continue to hold an unsecured line of credit that you can't pay down in time, when economic conditions change.

It's the specific situation that raises the question in my head. I'm the lender, you're the borrower. Yesterday I said, "You can borrow $5 grand at 10%". You borrow 5 grand. Today I say, "Oh, no, you can only borrow $4 grand, and now you're over limit so I can charge you $100/month extra in fees".

It's one thing to change the limit - I've no problem with that - but to lower the limit BELOW the balance strikes me as something of a bait-and-switch. If they lowered the limit *to* the balance, making your available credit 0, I'd have no concerns at all.

The whole point is that it's an unsecured line, and the lender ought to get a fair amount of leeway in assessing your ability to pay back the debt.

Yes, I agree - but if they change their minds AFTER they already lent the money (which in these cases they have), then in my view its too late on their part.

Instead of getting angry at banks for ****ing you, get angry at the government for causing this whole damn mess in the first place.

I am not emotionally vested in this at all - I don't know why you think I'm angry. I have no credit card debt at all.

I don't even think it's that. If it as retroactive, maybe.

And I think that to some degree, this particular policy is like a retroactive change.

But if you knew all along they could change it (or should have) then you only have yourself to blame for using a revolving line of credit more like a loan.

IF the terms quite explicitly say, "We can lower your credit limit to a point lower than your balance and fine you for it" then yes, I'd agree. If the terms are "credit limits can be adjusted at any time", then I think that's vague and open to some interpretation.

[KendallJ]

So I'm curious Greebo.

Do you think that it should not be a right of the bank to ask you to pay down your debt in certain circumstances? How do you suggest the bank go about doing that? A revolving line of credit is not a loan in the same way. What you have on the credit line at the time seems arbitrary limit to me. If your risk profile changes, then the bank should have hte right to reassess your credit worthiness and change your line of credit. What you ave chosen to take out against htat line of credit shoudl nto have bearing on what your actual credit worthiness is, should it?

It is specifically not a retroactive change. I think that makes a big difference.

Sorry by the way, the "getting mad" reference was more figurative.

[Pokarrin]

Yaron Brook http://www.youtube.com/watch?v=9PcH8m2WozUin which he addressed the subject of government regulators like the FDA. He stated, as I recall, that one of the problems with government regulation in the market is that it accustoms the citizenry to trusting the government agency's judgment instead of their own, thereby distorting the market in favor of the less quality-oriented companies who can simply point to their certification or rating as proof that they have a good product. I think we have a similar problem with credit card companies; we know that the financial industry is heavily regulated, and tend to equate that with quality of service, despite the fact that even a cursory reading of the TOS often reveals terms many people would not be willing to accept. That's the reason I have never had a credit card and never plan to. What needs to be understood is that the government cannot make financial (or any) choices for us; the individuals in the FTC, SEC, FDIC and whatever other acronymical animals are pretending to safeguard our financial future simply don't have and can't have sufficient knowledge to decide for us what terms should be acceptable, even if they really did have each of our best interests at heart, which is by no means a certainty.

[Greebo]

So I'm curious Greebo.

Do you think that it should not be a right of the bank to ask you to pay down your debt in certain circumstances?

Tricky working, but the answer is no.

How do you suggest the bank go about doing that?

My specific objection isn't to the lowering of the credit limit, but the lowering of the credit limit to a point *below* your existing balance, causing you to incur penalties for being over a limit that wasn't there when you borrowed the money.

My implementation to force a debt to be paid down would be to automatically lower the credit limit every time a payment is received, and to notify the customer of same. Thank you for your payment of $250. $150 has been applied to interest, and $100 to principle, and your credit limit has been lowered by $100. OR simply allow no new charges to be accrued - freeze the card.

A revolving line of credit is not a loan in the same way. What you have on the credit line at the time seems arbitrary limit to me. If your risk profile changes, then the bank should have hte right to reassess your credit worthiness and change your line of credit. What you ave chosen to take out against htat line of credit shoudl nto have bearing on what your actual credit worthiness is, should it?

I have no disagreement with this reasoning. I have a specific disagreement with the action that in essence says that on Monday, your credit worthiness is $5,000, on Tuesday, you use that $5,000, but today, Wednesday, your credit worthiness is now $4,000 so even though we *agreed* that you had every right under our estimation to use $5,000, now we disagree, and in addition to making you pay back that $1k, we're fining you for being over the credit limit that didn't exist when you used the money.

It is specifically not a retroactive change. I think that makes a big difference.

If they fine you for going over limit when *they* changed the limit, then I think that constitutes a retroactive change.

[KendallJ]

My implementation to force a debt to be paid down would be to automatically lower the credit limit every time a payment is received, and to notify the customer of same. Thank you for your payment of $250. $150 has been applied to interest, and $100 to principle, and your credit limit has been lowered by $100. OR simply allow no new charges to be accrued - freeze the card.

I'll deal wiht this one specifically, but I think in general, you are simply gauging the propriety of a particular action based upon some sort of intuition that you think is fair. What you're saying might appear to be fair, but it assumes something about the relationship. For example, you are confusing a loan with a line of credit.

Here is an example in your discussion above. The minimum payment on a line of credit such as a credit card, is NOT related to a paydown schedule such as in a loan. It is not built to pay down a line of credit. However, you are suggesting above that we simply allow the customer to "pay down" the debt as they normally would, but they may not normally. In fact, the worst credit risks, i.e. those who the bank would really want to now pay down their debt level to a new level, are probably the ones that do not pay more than the minimum. So you are essentially saying that these people should get great leeway in paying down their debt, and that the bank should extend it's exposure for an almost indefinite period of time.

If you suggest that the minimum payment can be increased arbitrarily to resolve this issue, I would submit to you that that is exactly what the bank just did. The bank is imposing a "minimum" payment that is designed to actually pay down credit, as in a loan. In essence the bank said, "We want you to pay down your debt. For this month, your minimum payment is now the difference between your new credit limit and your outstanding balance. If you choose, you can defer that minimum beyond the billing period at your option, but you will incur fees on that difference until it is paid off.

The bank doesn't actually impose a paydown schedule, but the fees are the only incentive you have to pay down your credit limit. It is the only leverage the bank has. If you like we could allow the bank to arbitrarily change the minimum to force you to pay down your limit faster, but I would bet that someone else will also feel that is unfair using the same sort of general intuition that you do above.

Frankly, I think given the reasonable rights of both parties, and what they have agreed to ahead of time, it's a very reasonable action. The bank should have a right to incentivize you to pay down your debt level. The minimum payment agreements do not reflect a paydown schedule. Either the bank can force you to increase minimum payments on a much more agressive schedule to pay that down, or they can penalize you for not paying it down and let you decide how quickly you want to pay it down. I don't think there is a material difference between either of those options.

Your option however, confuses the minimum payment with a "loan paydown schedule." They are not the same thing, and you leave the bank with very few options to take reasonable action to protect its exposure.

[DavidOdden]

My specific objection isn't to the lowering of the credit limit, but the lowering of the credit limit to a point *below* your existing balance, causing you to incur penalties for being over a limit that wasn't there when you borrowed the money.

I understand why you wouldn't like that situation. But did you not understand that that was a possibility when you signed the contract? Analogously, suppose you borrowed money on a certain set of assumptions about income and the facts change, so that you can't make the minimum payment and are charged extra. That would suck, but you agreed to that obligation. Why isn't that sufficient for you?

[KendallJ]

I have no disagreement with this reasoning. I have a specific disagreement with the action that in essence says that on Monday, your credit worthiness is $5,000, on Tuesday, you use that $5,000, but today, Wednesday, your credit worthiness is now $4,000 so even though we *agreed* that you had every right under our estimation to use $5,000, now we disagree, and in addition to making you pay back that $1k, we're fining you for being over the credit limit that didn't exist when you used the money.

Might I suggest that in the case of a request for paydown that you putting words in the banks mouth that give the appearance of unfairness. You need to pay down your debt, that is a reasonable request from a bank. If I instead say that the bank is saying "we're charging you additional fees for your decision to exercise your option to continue to carry credit above a limit we now believe is reasonable given your creditworthiness. These fees compensate us for the new risk we continue to carry with this additional credit." It sounds a little more fair....

Your agreement with the bank does not give you the right to hold whatever costs were when you "borrowed" the money. It's not a retroactive decision, and that makes a huge difference. You can reasonably "borrow" the money, knowing that in the future, the bank could change your terms. The bank never implied that these terms woudl be fixed, but you seem to want to think that it's "unfair." This is completely different from a retroactive action. Rand rails against retroactive actions because they are essentially "unforseeable" actions by definition, and so disable man's use of reason. (e.g. it's impossible for me to choose to do something today, if tomorrow, that action will have been illegal when I made the decision, but was not actually illegal when I made the decision. Such a thing cannot be a crime, but is made one.)

These actions are not a parallel case, even though they feel like it to you. When the bank changes your limit, you have a choice to make about your future actions. Pay down the debt or do not. If you choose not to, then your future fees will be raised. There is nothing that disables your ability to avoid the charges, in the future.

Edited March 18, 2009 by KendallJ

[themadkat]

I understand why you wouldn't like that situation. But did you not understand that that was a possibility when you signed the contract? Analogously, suppose you borrowed money on a certain set of assumptions about income and the facts change, so that you can't make the minimum payment and are charged extra. That would suck, but you agreed to that obligation. Why isn't that sufficient for you?

Playing devil's advocate for a second, I wouldn't have understood that was a possibility. Especially because, when the terms of your agreement with a credit card change, you are permitted to "opt-out", such as with an interest rate change. All you have to do is stop using the card and let the company know in writing that you opt out of the change of terms (for example an interest-rate hike), and then provided you don't use the card anymore you can continue paying down your existing balance under the previous terms. It is not at all obvious to me that you can lower someone's credit limit below their balance causing them to immediately incur fees, especially without prior notice (I would have a little more understanding if they told them a month in advance or something).

For me personally, I don't care. I've never been anywhere near my limit and I've never had a cc company notify me of anything but an increase in credit, ironically far beyond what I could probably pay back. I guess I just have an honest face.

[KendallJ]

It is not at all obvious to me that you can lower someone's credit limit below their balance causing them to immediately incur fees, especially without prior notice (I would have a little more understanding if they told them a month in advance or something).

It's not immediate. As Greebo has indicated above, there is a grace period applied to the new fees.

[Greebo]

I cannot hear your complaints about my supposed assumptions over the raging volume of your own.

Assumption 1: I know very well how amortized loans vs. lines of credit work.

Assumption 2: They are lowering limits below existing balances on good paying customers as well as bad

Assumption 3: You do not know how much those "bad risks" pay

I'll stop itemizing them now.

I threw out a specific answer as to how my implementation would work, and then put up an example of how an incoming payment would be processed. I threw out an arbitrary number and arbitrarily split it into principle and interest. Regardless of whether it is a line of credit or a loan, your payments have an interest portion and a principle portion. How they are determined varies between an amortized loan with a fixed payment and a line of credit with a variable payment, but nevertheless, there *is* an interest and a principle portion (in the US, by law).

Contractually, by the terms of service (required by Law in the US), how the minimum payment is calculated must be spelled out. This contractual calculation is a promise on the part of the lender that says "if you borrow X, and X is a value less than or equal to your worthiness as we determine it, you will have to repay Y at a minimum"

At the time of borrowing, the borrower is credit worthy of X.

AFTER the money is borrowed, the bank decides they are worth < X.

I don't mind that the bank decides their worthiness has been lowered, but *at the time the bank lent the money* the valuation was higher. If the bank changes the limit after the money has been lent, then I do not see why the bank should not be obliged to stick to the contract terms in force at the time.

I would like you to address *that* point, which you appear to have completely ignored in your long and unnecessary lecture on how lines of credit work.

[Greebo]

I understand why you wouldn't like that situation. But did you not understand that that was a possibility when you signed the contract? Analogously, suppose you borrowed money on a certain set of assumptions about income and the facts change, so that you can't make the minimum payment and are charged extra. That would suck, but you agreed to that obligation. Why isn't that sufficient for you?

Let me point out again, this isn't a situation applicable to me specifically. I have no credit card debt.

Your analog is irrelevant - if I can't make the obligation I agreed to, I'm subject to the penalties.

What I'm saying is that I believe the credit limit at a time when the money is lent constitutes an implicit agreement on the lenders part. We're lending you X and you are repaying us based on a specific formula.

Of course, *if* the CC terms specifically state something to the essence of "if we lower your limit we can still charge you fees if that limit goes below your current balance" then all objections on my part are off.

If I could only find an example of those specific CC terms somewhere online...the CC companies seem to do a good job of hiding them. (Another reason never to use them...)

[KendallJ]

Assumption 1: I know very well how amortized loans vs. lines of credit work.

Then you need to reflect that in your conclusions and examples. I realize you might feel that you do. But then maybe it's a psychological issue that you simply continue to feel that the situation is unfair, when it's not.

Assumption 2: They are lowering limits below existing balances on good paying customers as well as bad.

How someone pays is only partially relevant to credit risk. The line of credit does not require a schedule of pay down so previous pay habits have no implication as to whether future pay habits will remain the same.

I'm curious as to what you think is a "good" paying customer. Since how someone pays on a line of credit (maintaining a running balance that is high enough to incur penalties in the case of lowering) says nothing about their ability to pay down debt in addition. It's the same fallacy as the minimum payment (which again makes me call into question Assumption 1). If I'm a "good" customer at maintaining a balance, that says nothing about my "goodness" at paying down debt. Why should I consider one in the terms of the other?

Assumption 3: You do not know how much those "bad risks" pay

Sure I do, and you do as well. The worst credit risk would pay, and does pay what they are contractually obligated to and nothing more. Come on, Greebo, someone who is sinking underwater financially, weighted down by credit card debt can do nothing else. Everyone here has heard such stories.

What I'm saying is that I believe the credit limit at a time when the money is lent constitutes an implicit agreement on the lenders part.

Why? The specific agreement allows the credit card company to change all sorts of things. Why is the credit limit sacrosanct? I can charge more interest arbitrarily on an existing balance.

We're lending you X and you are repaying us based on a specific formula.

Stop it. There is no "pay back" provisions on a line of credit, other than the one's you're taking issue with. The ones that let the bank require you to "pay down" debt under specific senarios, are the very provisions you're taking issue with.

Honestly, this "implicit agreement" stuff. You're making stuff up, to continue to "feel" that there is something wrong with this. The EXPLICIT agreement says different. If it didn't you might have a case. There cannot be something implied which is explicitly countered.

Edited March 18, 2009 by KendallJ

[Greebo]

Then you need to reflect that in your conclusions and examples. I realize you might feel that you do. But then maybe it's a psychological issue that you simply continue to feel that the situation is unfair, when it's not.

Are you paying attention to the questions you ask when you read my answers?

You asked:

How do you suggest the bank go about doing [asking you to pay down your debt in certain circumstances]?

I replied:

"My implementation to force a debt to be paid down would be to automatically lower the credit limit every time a payment is received, and to notify the customer of same."

And then whipped up a sample to give a clearer idea: "Thank you for your payment of $250. $150 has been applied to interest, and $100 to principle, and your credit limit has been lowered by $100. OR simply allow no new charges to be accrued - freeze the card. "

The question and answer have absolutely no relationship to the type of loan - I answered an implementation question, and from that you felt you needed to lecture me on how lines of credit differ from amortized loans...

How someone pays is only partially relevant to credit risk. The line of credit does not require a schedule of pay down so previous pay habits have no implication as to whether future pay habits will remain the same.

Agreed on the first part. Not agreed on the second. The contract tells you explicitly how your minimum payment will be calculated. The determination of that minimum payment creates a timeline as a part of its calculation. Using that calculation, you can determine exactly how long it will take you to pay off a debt paying only that minimum, if you add no more debt.

The lowering of the limit to impose fees if the limit is not reached within a grace period acts as a de-facto violation of that minimum payment agreement. I, the borrower, did not go over the limit, you the lender took action to push me over the limit after allowing me to borrow to a point that was previously below the limit.

I'm curious as to what you think is a "good" paying customer. Since how someone pays on a line of credit (maintaining a running balance that is high enough to incur penalties in the case of lowering) says nothing about their ability to pay down debt in addition.

Most credit cards base your credit limit on your payment history and your credit score. Your credit score is, itself, a reflection of how much debt you carry, and how well you maintain the service on that debt (do you pay late? do you keep a high utilization, etc).

From the perspective of the CC company, a customer who maintains a balance and pays on time is the dream customer. The CC collects a LOT of interest from them that way.

It's the same fallacy as the minimum payment (which again makes me call into question Assumption 1). If I'm a "good" customer at maintaining a balance, that says nothing about my "goodness" at paying down debt. Why should I consider one in the terms of the other?

You do know that CC companies had to be forced by law to make the minimum payment actually contain a principal portion, right? (I don't agree with them being forced, btw, just stating the fact). In my opinion, the CC companies don't usually *want* you to pay them off - they want to keep that interest income rolling in. If I were a lender, I certainly wouldn't object to making more money that way.

Sure I do, and you do as well. The worst credit risk would pay, and does pay what they are contractually obligated to and nothing more. Come on, Greebo, someone who is sinking underwater financially, weighted down by credit card debt can do nothing else. Everyone here has heard such stories.

Allegorical evidence is not statistical evidence. I know people (yes, plural) who are as you say (and once was one), and I know people who carried a large balance because they bought something big and were paying it off quickly but not immediately (ie: over the minimum but not in full). Some of those people I know have been hit by these limit adjustments despite their paying more than the minimums.

You cannot validly apply a blanket statement such as "In fact, the worst credit risks, i.e. those who the bank would really want to now pay down their debt level to a new level, are probably the ones that do not pay more than the minimum." to the people being hit by these limit changes.

Edited March 18, 2009 by Greebo

[prosperity]

Now if you've ever read the TOS for a CC, basically when you sign the application you give them permission to **** you over any way they like. Rate changes, due date changes, limit changes, etc., all at their discretion.

There is no conflict. If you read their contract and it says that they can do whatever they want, then that is something you sort out BEFORE you sign on the dotted line. The fact that you want something doesn't mean that you are entitled to it. This is essentially saying that you deserve $xx.xx amount of credit regardless of your contract, credit, or internal practices of the business.

A lot of people would laugh at this, but the credit card companies are becoming slaves of the cardholders.

[prosperity]

A revolving line of credit is not a loan in the same way.

I would actually say that it is a loan, it's just a different type of loan. Revolving lines of credit are inherently problematic because they are not a fixed type of loan with an amortization schedule and a maturity date.

[KendallJ]

I would actually say that it is a loan, it's just a different type of loan.

If you look at my statement wording exactly, I think you'll see that we are in violent agreement.

[KendallJ]

Are you paying attention to the questions you ask when you read my answers?

You asked:

How do you suggest the bank go about doing [asking you to pay down your debt in certain circumstances]?

I replied:

"My implementation to force a debt to be paid down would be to automatically lower the credit limit every time a payment is received, and to notify the customer of same."

And then whipped up a sample to give a clearer idea: "Thank you for your payment of $250. $150 has been applied to interest, and $100 to principle, and your credit limit has been lowered by $100. OR simply allow no new charges to be accrued - freeze the card. "

The question and answer have absolutely no relationship to the type of loan - I answered an implementation question, and from that you felt you needed to lecture me on how lines of credit differ from amortized loans...

I did read your question, and I answered it specifically, and in fact the following discussion that you raise makes my answer completely pertinent. Let me work through your discussion here, and then I'll show you that I've not changed my reply to your original statement.

Agreed on the first part. Not agreed on the second. The contract tells you explicitly how your minimum payment will be calculated. The determination of that minimum payment creates a timeline as a part of its calculation. Using that calculation, you can determine exactly how long it will take you to pay off a debt paying only that minimum, if you add no more debt.

The lowering of the limit to impose fees if the limit is not reached within a grace period acts as a de-facto violation of that minimum payment agreement. I, the borrower, did not go over the limit, you the lender took action to push me over the limit after allowing me to borrow to a point that was previously below the limit.

You do know that CC companies had to be forced by law to make the minimum payment actually contain a principal portion, right? (I don't agree with them being forced, btw, just stating the fact). In my opinion, the CC companies don't usually *want* you to pay them off - they want to keep that interest income rolling in. If I were a lender, I certainly wouldn't object to making more money that way.

I'm not going to deal with the rest of your clip and snip. This section is the essential point of contention, and from which you derive your assumption.

The fact that credit card companies were forced to include a principal component in the "minimum payment" is a very telling aspect and what leads to the confusion. So let me be clear again: the "minimum payment" is not in any way, a schedule to pay down debt. It is not an amortization schedule. In a line of credit that any rational bank would issue, the minimum payment would be the interest payment only. The fact that banks are forced to do otherwise simply indicates this as well. The fact that they are forced to however, does not confer some sort of special status on this payment as an amortization schedule for payback. You imply that because it gives the appearance of it, but it is not how the instrument works explicitly. The fact that you can pay the debt back according to that schedule does not in any way imply that it would be the actual rational way a bank wants its debt paid back. In fact, the mimimum payments, even though they contain a principal portion are closer to the interest only portion than any sort of reasonable payback schedule. That's because banks will only do the minimum by law, and they would do nothing if they could. They handle actual pay back separately, and should.

Try it, take any forced "minimum payment" that contains a principal payment and actually create an amortization schedule from it. It's ludicrous. I googled one quickly. $5,000 balance at 14% and a 2% mimum payment takes 22 yrs to pay off! This was never intended nor is it contractually set up to be an amortization schedule to pay down debt on a line of credit. It is intended to be the interest payment (which is the rational "minimum payment" on a line of credit) plus whatever the law requires in addition (plus whatever calculation the law requires you to show with it).

A line of credit is a short term financing instrument, and it is properly structured that way. That means that the provision to remove part of that line, requiring a user to pay down debt are separate from a "minimum payment" and so they are. To suggest otherwise is to force the bank to assume long term risk (such as 22yrs!) when the device is a short term device, and when conditions require short term changes.

You've essentially argued that the minimum payment which is forced by law to include principal, and subsequently forced by law to show a customer what that term would be, if it was an amortization schedule (which it is not), somehow confers an implicit contract on the part of the lender, when in fact the provisions for lowering hte line of credit are explicitly stipulated in other terms.

This is a really good example of how bad thinking gets regulations put up in the first place, and how subsequently bad thinking blames the free market players when the fault is with the regulation. The irony is that the same "feeling of unfairness" that you claim on the part of the bank, is probably the same "feeling of unfairness" that led to them being forced to include principal in the minimum payment anyway. The proper response to this is to recognize that hte whole thing is caused by government intrevention, and that if you don't want to understand what a line of credit should be used for, or that you don't want to understand the terms you're agreeing to up front, then the fault lies with you, and not the "unfairness" of the banks.

Edited March 18, 2009 by KendallJ

[KendallJ]

Now, just to show you that I was paying attention to your senario, here is exactly what I said before.

Here is an example in your discussion above. The minimum payment on a line of credit such as a credit card, is NOT related to a paydown schedule such as in a loan. It is not built to pay down a line of credit. However, you are suggesting above that we simply allow the customer to "pay down" the debt as they normally would, but they may not normally. In fact, the worst credit risks, i.e. those who the bank would really want to now pay down their debt level to a new level, are probably the ones that do not pay more than the minimum. So you are essentially saying that these people should get great leeway in paying down their debt, and that the bank should extend it's exposure for an almost indefinite period of time.

Your further discussion clarifies that I knew exactly what you said, and responded to it. My answer above is not substantially changed from this one.

You are suggesting that the "minimum payment" calculation also be considered an amortization schedule for pay down of debt. And you are suggesting that banks when they extend you credit should expose themselves to pay down periods of excessive length as a result. And you are doing so, even though you admit that the "minimum payment" as it exists today is a forced term.

If you are not an advocate that the force exists, then recognize that what would happen is exactly opposite of what you think is implied. The "minimum payment" would simply entail the servicing of the interest, and a separate provision for debt paydown would be made. Yet, other than the added principal, that is exactly what you have an issue with today. There is a "minimum payment" and separate terms that allow reduction of the line of credit. Yet you seem to have an issue with it.

Edited March 18, 2009 by KendallJ

[Greebo]

The fact that credit card companies were forced to include a principal component in the "minimum payment" is a very telling aspect and what leads to the confusion. So let me be clear again: the "minimum payment" is not in any way, a schedule to pay down debt. It is not an amortization schedule.

I agree.

In a line of credit that any rational bank would issue, the minimum payment would be the interest payment only. The fact that banks are forced to do otherwise simply indicates this as well.

Your conclusion: To be rational, given the choice, a revolving line of credit extended by a bank would only require repayment of interest, not principle. If a bank chose to require principle repayment, that would be irrational.

Am I restating that correctly? If so, I would like to know your premise and logic for claiming that it is irrational for a bank to voluntarily choose to issue a revolving line of credit (secured or unsecured) with an implicit repayment component?

The fact that they are forced to however, does not confer some sort of special status on this payment as an amortization schedule for payback. You imply that because it gives the appearance of it, but it is not how the instrument would and should work.

They are not forced to issue the card. They are constrained (improperly as we agree) by law into requiring that if you pay the minimum payment, you will eventually pay them back in full. They can still choose whether or not to issue the card. Thus they are, I think, properly contractually bound to respect the minimum payment formula.

The minimum payment formula does create a time to repay, but that time to repay is a derivative of the formula. So no it isn't the time period I'm talking about. I'm talking about how the practice of lowering the limit to a point below the amount currently owed does an end run around the minimum payment by forcing an amount more than the minimum to be due in a nearly immediate period.

A line of credit is a short term financing instrument, and it is properly structured that way. That means that the provision to remove part of that line, requiring a user to pay down debt are separate from a "minimum payment" and so they are. To suggest otherwise is to force the bank to assume long term risk (such as 22yrs!) when the device is a short term device, and when conditions require short term changes.

I guess I'd need to see the structuring to be sure about this - and I'm still not finding any terms posted online (shocker). *IF* the terms explicitly spell this all out, then I will gladly remove all objections to the practice.

[KendallJ]

Your conclusion: To be rational, given the choice, a revolving line of credit extended by a bank would only require repayment of interest, not principle. If a bank chose to require principle repayment, that would be irrational.

Am I restating that correctly? If so, I would like to know your premise and logic for claiming that it is irrational for a bank to voluntarily choose to issue a revolving line of credit (secured or unsecured) with an implicit repayment component?

Nope. I am saying that a line of credit is different than a loan, as Prosperity has said as well. Because, in a loan, servicing the loan, and repaying the loan are the same thing. An "amortization schedule" is the mechanism for both. In a line of credit, servicing the line of credit, and closing the line of credit (i.e. paying it off) are two separate activities.

This is exactly how corporate lines of credit work. I take out a line of credit with the bank. It is no different than a credit card. To service that line, I simply pay the interest charge on what I have in use during the service period. If I or the bank want to retire that line, either I pay it off, at my option, OR the bank can call the line if my credit worthiness changes. But if I don't desire it, I don't pay off the line, and in fact, most companies carry steady regular balances on their credit line and pay regular interest. End of story. The bank only cares about your credit worthiness to be able to one day pay off the balance (if you should decide to do it), and your cash flow position to be able to service the loan. Corporate lines of credit are revoked and lowered all the time. If your company's position worsens, then you may be required to pay it down, and immediately.

What probably happened is people, confusing a line of credit and a loan, said that banks were being "predatory" by causing people to run up a big credit card balances, and only ever charging them interest on it. It's not the banks fault, it's the fault of the person using the line of credit. So they began forcing them to include some principle in the min, and in a "truth in lending" sort of fashion, required them to show you how long it would take you to pay off at that rate. It makes it look like it is actually an "amortization schedule", but it is not. That is why terms such as the one you are objecting to are not removed from credit aggrements. Those are the real terms that cover calling a credit line. The "minimum payment" just looks like it, but that is only because of govt intervention.

As a short term facility, unsecured credit lines, such as credit cards, must be short term for both parties. Both parties can react to their own positions and those of their counter parties in the short term. I can decide when to use the line, and in what manner I pay it off. The bank can decide to call all or a portion of the credit term. To make it a short term facility for the buyer, but then treat the other half of the agreement as if it is a long term loan is duly unfair to the bank. Frankly the fact that there is a grace period at all is an incredible benefit to the user. I essentially have a "free" 30 day credit line. Corporate lines of credit don't have that.

[prosperity]

If you look at my statement wording exactly, I think you'll see that we are in violent agreement.

Oh. I thought you were saying it wasn't a loan, or wasn't really a loan. It is interesting the point you make, and disappointing that lack of personal responsibility forces banks to create products that they don't want to create - i.e. the mutated "line of credit" turned quasi fixed-term loan.

I still say the credit card companies are the victims here, even though I suspect some people may laugh at that.

[DavidOdden]

Playing devil's advocate for a second, I wouldn't have understood that was a possibility. Especially because, when the terms of your agreement with a credit card change, you are permitted to "opt-out", such as with an interest rate change.

The problem is, without looking at the contract, we can't determine whether that's a reasonable position. I don't do credit cards so I can't look at a sample to see whether this is included in an "opt-out". If someone want to post the contract (full, names omitted) we could pick it apart.

Here is an application which contains the agreement. Paragraph 4 is clear, in my opinion. Here there is no "grace period". Paragraph 14 states that they may unilaterally rewrite the contract. If you -- or Greebo -- have a contract that states otherwise, then there is room for discussion. Given what that contract says, I don't see that there is any room for discussion. Once your credit limit has been lowered, you must reduce your debt to be below that figure. Nowhere does it say "and the $10.00 fee is waived for the first month that you are in violation of paragraph 4". If you cannot comply with the terms of the contract, you have to pay the fine. If you do not want to run the risk of having your credit limit lowered, do not apply for the card.

Seriously, does anyone not understand paragraph 4 as saying "We can lower your credit limit, even on a whim, and you must never ever be over your limit or else you will have to pay a fee"?