Ramblings by Rach - Ramblings by Rach
***Disclaimer- I am by no means a financial expert, nor do I have any professional training or education in finance (Except for 2 Certified Financial Planning courses). I simply enjoy learning as much as I can about investing, finance and budgeting, and anything posted on this blog is my own opinion, and a professionally un-informed opinion at that.***

Yesterday when we picked up the mail, once again there was a letter addressed to Blair and I from Visa, marked Urgent! A Special Opportunity Inside!

This was the third letter of this type we have received over the last 6 months.

So, once again I opened the letter to see what it had to say... I mean after all, maybe they are offering us a one day shopping spree or something on our credit card. A girl can dream, right?

But no, the "special opportunity", available only for a "limited time" was an offer to increase our credit limit by 50%.

Most people would not think twice about increasing their credit limit. Wonderful!! They might think. Visa thinks I am such a trustworthy and good customer that they want to give me more credit. I rock! Right? Wrong.

Until recently, credit card companies could increase your credit limit without the average person even noticing. There would just be an increased amount showing on your statement when it arrived, and a small notice at the bottom indicating that your limit had been increased, and if you did not with to accept this limit increase, you had to call Visa and cancel it.

On May 21, 2009, The Minister of Finance released new credit card regulations to help protect consumers. Relating to this blog is article 6. CONSENT TO INCREASE CREDIT LIMITS, which reads

An institution may not increase the credit
limit on a borrower’s credit card without first
obtaining the borrower’s express consent to do so.

You might be wondering why this is a big deal. So you have a high credit card limit. Some might think that this helps your credit rating- especially if you pay off your balance in full each month. This makes you look good to creditors, right? Nope, sorry.

Let's look at an example. Let's say you are going into the bank to try and get a car loan for a new vehicle. You have no debt other than a student loan ($150 per month) and your mortgage ($1200 per month) which is split between yourself and your partner. All of your credit cards are paid in full, and that line of credit you got "just in case" while you were going through college has not been touched.It should be easy to get approved, right?

When trying to decide if you are going to get approved for a loan or not, the lender is looking at the credit that has already been extended to you. They want to make sure that if you did rack it all up you that would you still be able to maintain your minimum payments to all of the other creditors, as well as to them for your shinny new wheels.

Suddenly, having a $15,000 Visa, a $10,000 MasterCard and a $5000 line of credit at your disposal seems like an awful lot for someone with a gross income $40,000. This is likely what the bank would think. This is called credit exposure or credit risk.

As Gail Vaz-Oxlade said in one of her Q and A answers- "The only time having a higher credit limit works in your favour is if you are carrying a balance and don't want to get too close to the top of your limit."

But what about security? You might ask. Some people find that having a higher credit limit makes them feel secure- they know that if something were to go wrong they have their credit cards or their lines of credit to bank them up. This is a tragic way to think. What should make you feel secure should not be having credit - it should be having money in the bank and a nice healthy emergency fund!

So you might want to think twice next time your credit card company offers you a limit increase, or you get a pre-approval in the mail for a department store card or a new credit card. Because accepting everything that is offered can have dire consequences when it comes to getting financing for something that you really want and need.

How much credit do you need? Gail Vaz-Oxlade suggests no more than 2-3 times what you charge monthly to your credit card.

For more information, check out Gail's website at http://www.gailvazoxlade.com/.

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