Credit limit reduction: reality vs. bureaucracy

praxisizer

I should be a credit card company's perfect customer. I'm low risk, since I'm never in (net) debt and I always have money lying around in my bank account, but I'm disorganized and so pay their interest and fines.

I have quite a few times in the past missed payments, and from time to time forget to pay off my credit card debt off in full, but I've never had any trouble paying it. However, I haven't missed minimum payments for a long time on my primary card (call it card #1), since I now have a direct debit, and my credit rating was good when I checked a year ago. The credit limit on card #1 got increased from time to time without my needing to ask them. I didn't have a problem obtaining my second credit card, card #2 (from a different company from card #1). Recently, though, I started using card #2 for a few things, and forgot to pay the minimum amount. That caused them to reduce my credit limit drastically, rendering it not very useful as a backup card.

I suppose one point against me from the point of view of the credit card company for card #2 is that I didn't use their card for long periods, since I used it mostly as a backup. Another is that they only see my failure to make a payment, not my bank balance, or (most of) my record with the other card company.

One obvious question that occurs to me is: Why can't I simply volunteer to prove to them that I'm a good risk by revealing some of my bank / credit card records? When I asked, they said I could "appeal" about the change in credit limit, which conjures up images of Terry Gilliam-esque insane bureaucracy for me. Has anybody here been through this appeal process?

So, what should I do? Appeal? Just use the card for a few months and pay it off carefully each month?

This also raises another issue: before this recent business with the credit limit reduction, I applied for a third card and was provisionally accepted. They then screwed up the application process (by their own admission), which means I have to apply again. Should I wait until my credit limit goes up again on card #2, or just try applying again now?

woody01

You are a poor risk because of missed payments.
Nothing you say to the CC companies will change that fact.

praxisizer

I'll note first that the issue I raised that you respond to here isn't the main reason for my post. Instead, I posted in the hope of somebody responding with some answers to the questions that I raised. With that out of the way, though, I'll answer your post:

woody01 wrote: »

You are a poor risk because of missed payments.
Nothing you say to the CC companies will change that fact.

So my point was that while your second statement may be true, that's merely a failing of the credit card company's risk assessment processes, not some deep necessary truth. Your first statement is incorrect without further qualification. If they were to consider the available evidence -- viz., the evidence that I can happily supply them with about my bank balance history and credit card history -- they would have more to go on, and would be able to modify the prior probability of my being a poor credit risk accordingly.

In the presence of other information, failure to pay a credit card bill is not an indication of credit risk. The reason for that is that the reason that people fail permanently to pay all of the money they owe to credit card companies is that they don't have enough money. The reason isn't that they have enough money and forget to pay for a month. So if evidence is provided that there is enough money, that is evidence of a much lower credit risk. But you knew that -- this ain't rocket science!

zppp

praxisizer wrote: »

So my point was that while your second statement may be true, that's merely a failing of the credit card company's risk assessment processes, not some deep necessary truth. Your first statement is incorrect without further qualification. If they were to consider the available evidence -- viz., the evidence that I can happily supply them with about my bank balance history and credit card history -- they would have more to go on, and would be able to modify the prior probability of my being a poor credit risk accordingly.

Perhaps, but they won't ignore the credit scoring just because you can present this information I'm afraid

praxisizer wrote: »

In the presence of other information, failure to pay a credit card bill is not an indication of credit risk.

It does indicate credit risk. The whole point of lenders searching credit files is to look at the risk of their money. Missed payments do make a difference.

praxisizer wrote: »

The reason for that is that the reason that people fail permanently to pay all of the money they owe to credit card companies is that they don't have enough money. The reason isn't that they have enough money and forget to pay for a month.

Or don't have enough to make the payment for that month maybe?

praxisizer wrote: »

So if evidence is provided that there is enough money, that is evidence of a much lower credit risk. But you knew that -- this ain't rocket science!

No, it is not evidence of a better credit risk. You are just asking an underwriter to consider your additional infromation for the application, that doesn't change the fact the limit has been reduced on commercial grounds.

praxisizer

zppp wrote: »

Perhaps, but they won't ignore the credit scoring just because you can present this information I'm afraid

Have you tried it?

Do you claim it would be rational for them to ignore the information if they could process it at less than the cost of the increased business? Are they all so inefficient that they're unable to achieve that? Perhaps so, in which case there's a business opportunity there for somebody.

It does indicate credit risk. The whole point of lenders searching credit files is to look at the risk of their money. Missed payments do make a difference.

These sentences seem don't seem to be connected to what I wrote, so I won't respond.

Or don't have enough to make the payment for that month maybe?

Ditto.

No, it is not evidence of a better credit risk. You are just asking an underwriter to consider your additional infromation for the application, that doesn't change the fact the application has declined.

I have found you an argument; I'm not obliged to find you an understanding.

Paul_Herring

A large part of being a 'good risk' is being able to make contractual payments on time.

If you're unable to make payments on time, for whatever reason, you are not a good risk.

They then screwed up the application process (by their own admission), which means I have to apply again. Should I wait until my credit limit goes up again on card #2, or just try applying again now?

If they screwed up, why can they not re-process without actually applying again?

zppp

praxisizer wrote: »

Do you claim it would be rational for them to ignore the information if they could process it at less than the cost of the increased business?

Which is how much exactly? I haven't said that they will disregard the additional information. I have simply stated that the information is additional and that credit scoring and the automatic data won't be ignored.

praxisizer wrote: »

Are they all so inefficient that they're unable to achieve that? Perhaps so, in which case there's a business opportunity there for somebody.

It has nothing to do with inefficiency. Credit card companies don't really know how much revenue they are going to make out of you.

praxisizer wrote: »

These sentences seem don't seem to be connected to what I wrote, so I won't respond.

I think you'll find it related fully to your previous post. Credit risk includes a large amount of data, some automatically obtained, some manually. Missed payments do make it hard for people to obtain further credit. The records of such are found on your credit file.

praxisizer wrote: »

I have found you an argument; I'm not obliged to find you an understanding.

I don't really understand what you want to argue?

praxisizer

Paul_Herring wrote: »

A large part of being a 'good risk' is being able to make contractual payments on time.

I'll just point out that you're merely restating a position, rather than making an argument for it actually being true.

The only interesting response to what I wrote that I can think of is "is it possible to handle that information at less cost than the increased revenue it would bring in". I think the mortgage case (Q: "give me a mortgage" A: "no, you forgot to pay a credit card bill once") provides a clear example where the answer is "yes", which reveals that the explanation for current business practice is actually inefficiency in the banking industry, not good risk assessment (sheesh, what else has been in the news the past two years, it should hardly be a controversial statement).

If you're unable to make payments on time, for whatever reason, you are not a good risk.

Me: here's a counterexample to statement X
woody01: X
Me: here's a counterexample to statement X
Paul_Herring: X
Me: shrug

If they screwed up, why can they not re-process without actually applying again?

"Computer says no".

praxisizer

zppp wrote: »

Which is how much exactly? I haven't said that they will disregard the additional information. I have simply stated that the information is additional and that credit scoring and the automatic data won't be ignored.

And I pointed out that that is an inefficient system.

It has nothing to do with inefficiency. Credit card companies don't really know how much revenue they are going to make out of you.

It's hard to know where to begin with this one!

I think you'll find it related fully to your previous post. Credit risk includes a large amount of data, some automatically obtained, some manually. Missed payments do make it hard for people to obtain further credit. The records of such are found on your credit file.

My problem is that our conversation has gone roughly like this:

Me: the system works <such-and-such a way>. That's inefficient.
You: the system works <such-and-such a way>.
Me: uh...

I don't really understand what you want to argue?

Right.

praxisizer

zppp wrote: »

It does indicate credit risk. The whole point of lenders searching credit files is to look at the risk of their money. Missed payments do make a difference.

Just to clarify: nobody doubts this. The issue I raised that seems to baffle everybody merely relates to the fact that additional information modifies the rationally-assessed risk, by changing the probability of default (according to Bayes' theorem).

Paul_Herring

I'll just point out that you're merely restating a position, rather than making an argument for it actually being true.

Just because you're not getting the answers you want, that's no reason to discount them.

http://www.timesonline.co.uk/tol/money/reader_guides/article3050813.ece

Missing a payment for a bill as trivial as your mobile phone contract could have a detrimental affect on your credit file and will remain on your report for three years.

http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6073048.ece

Regardless of the reason for a missed payment, the knock-on effects can be severe. Melanie Bien, of Savills Private Finance, the mortgage broker, says: “Homeowners are under a huge amount of pressure, mistakes do happen and it is easy to slip up. The costs can add up quickly and the impact on your credit report can be critical if you plan to remortgage with another lender. Banks and building societies are looking at credit histories more closely than ever.”

http://en.wikipedia.org/wiki/Subprime_lending

Subprime borrowers show data on their credit reports associated with higher default rates, including limited debt experience, excessive debt, a history of missed payments, failures to pay debts, and recorded bankruptcies.

http://www.consumeractiongroup.co.uk/forum/credit-reference-agencies/227343-credit-score-late-payment.html#post2855928

I cleared my credit card to £0 a few months ago but didn't notice that some interest was still to be calculated (the card had been locked away, and not used) to the amount of £8! I never expected to have to pay anything so missed a payment. Result is that this has declined my mortgage application. My fault, and I acknowledge that. Since set up direct debit for minimum amount.

http://www.moneysavingexpert.com/loans/credit-rating-credit-score

Usually, these stay on your file for six years, so anything before that may be wiped off. However, if you close an account, then missed payments could remain on your file until the sixth anniversary of account closure.

http://www.creditsearcher.co.uk/features-1079474687.html

There are numerous ways by which you can end up saddled with a poor credit rating. This includes county court judgments (CCJs), defaults, mortgage rent arrears, bankruptcy, individual voluntary agreements (IVAs), previous repossession or late / missed payments on credit cards or loans.

http://www.moneysupermarket.com/credit-cards/credit-builder/

The credit crunch has made banks and other credit card providers very wary about lending to people with blemished, or incomplete, credit histories. If you have missed payments, or managed to get by without credit cards, loans or mortgages, in the past, you may therefore need to work on improving your credit score before you stand a chance of getting accepted for the best deals.