CLF loans
CLF loan menu



Your Spouse, Your Credit Cards, Your Debt, and You

There will come a time when you apply for a loan and your spouse’s credit bureau report will also be reviewed. The benefit of two incomes also carries with it the prior repayment history of each applicant. Challenge your individual rights to privacy based on marital status, sexual orientation, religion, and other personal information. Question how anyone knowing this (any particular data requests) helps determine the bank’s risk of your repayment. It would be interesting to see what the loan officer would say in response. Having said that, don’t offer additional information unless you determine it is necessary.

When you tell them that you have a spouse, you also present the risk that you have dependents (however in today’s world this should be a poor conclusion). Children are a risk only so far as they represent an additional commitment for cash each month while you meet the increased needs of your family. In banking terms this is know as your personal inflation rate. Not only do dependents and a spouse (that doesn’t earn money) cost you a lot of money now, they will cost you a lot of money later, and even more money as time goes on. Plainly put, you are likely to feed them before paying your bills. Also, if you identify that you have two children, then complete another application later on and advise that you have only one child living with you requiring your assistance. Of course the first thing the bank will ask, is if you are paying child support to a guardian or an ex-spouse.

You have revealed how long you’ve worked for your present employer, your salary, and your position with your company. This information can be compared against the last time you applied for credit and entered similar details. Someone reviewing your bureau report can identify how transient your employment is, and when completing a future application, are able to determine your employment tendencies. How long do you stay at one job? Are you unemployed regularly in the same industry? Did your employment or salary change from the last time you applied for credit?

There are many things kept on a database for all to see and use. Each time you apply for credit you are also giving written consent for someone to review your credit bureau report. You are also updating the information in more detail each time you apply for credit. The more information on a person’s credit bureau report, the more complete a lender’s perception becomes, the scoring models (which we will review later on) become more refined.

But don’t get me wrong – look on the bright side; after completing the in-store bank’s credit application you did get a free pen set. Did you know that the more credit cards you have, the less borrowing power you have readily available?

It’s great when you may belong to the population of people that can actually pay their credit cards to zero each month (which is 55% of all borrowers), but all that shows is that you are not comfortable with debt. Don’t misunderstand this statement – nominal debt does minimize the risk in lending to you but each card you carry has its own limit. Even though you pay your cards to zero each month you have the choice to max them all out, and at any time. With this in mind banks calculate about 2 to 5% of the limit that needs to be paid. This reduces the amount of cash you have each month to service debt on paper, even though you pay your cards monthly. I know that this sounds ridiculous, but you do have the option to maximize the amount of debt on your cards at any time, and your bank will take that into consideration when lending to you.

All Too Common Example/Scenario of a Marriage Breakdown and Personal Financial Devastation

"What have You Done!!"

“What have You Done!!”

Let us use an example which is a very typical scenario for people going through divorce. Let’s just say that Mark and Mary are both married, have three children, and they both work full time. For 10 years they have been married with squeaky clean credit ratings because they always make their payments on time, and in fact, make their payments long before their due dates.

They both have three credit cards each (MasterCard, American Express card, and a Visa). They have a credit limit of $10,000 on each card which totals $60,000 in possible credit available to them at any time. During their happier years of non-addiction and frugal spending habits, when they were working as a team, they always made their payments on time, and their financial house was in perfect order.

Then Mark became addicted to drugs and alcohol. He became very reckless with his money, and began spending thousands of dollars a month (more like a week) on his addictions, and began gambling as well. With his losses gaining dramatically, his debt went into a nasty spiral. Soon enough he was having affairs with other women due to his lack of control under his addiction, and Mary found out about it. She filed for divorce.

Mark and Mary spent an extremely stressful year during their bitter divorce and during that time both of them went completely out of control with their spending. Mary spend money traveling and putting money away for security by taking cash withdrawals from all of her Visa cards and stuffing that cash away in a safe place (not in a bank, but in her mattress). Mark continued with his poor choices and dangerous lifestyle spending even more money than Mary from his Visa cards and credit line. Within eight months their $60,000 credit on their credit cards was completely maxed out, their savings were gone, and their joint line of credit of $50,000 was maxed out. In short – they were screwed. This is what the banks look at when they see statistics of divorce in America. Just because you have been behaving like responsible adults all your life (and still are) doesn’t mean they assume you will continue to do the same in the future.

How Many Credit Cards Do You Really Need?

Pick a Card - Any Card!!

Pick a Card – Any Card!!

Try getting a low interest charge card from your bank, or a line of credit linked to your account for point-of-sale purchases. And cancel unwanted cards in writing. Then keep the outdated copy. This decision carries with it a few other benefits other than simply having one card to worry about. Your bank now respects your decision to carry their card, and that adds value to your relationship when looking for additional credit at that bank later down the road. If you also have other cards with many other banks, your bank sees that you are sharing all of your information with other competing institutions, and no bank likes to share your wallet with another.

Sharing your banking relationships can become a yellow flag in the lending process as bankers see a risk for what is known as “kiting” (floating money between accounts to cover the same group of checks, where a fraudulent person has the ability to access cash that isn’t theirs until they are found out). Banks have very sophisticated systems in place that do nothing but track deposit behaviors of people and cross-check those behaviors against fraudulent profiles. Kiting is illegal in some countries, and is subject to prosecution. It is sort of like a personal Ponzi scheme using bank credits you have accumulated over the years.

Sharing bank relationships are viewed cautiously, where a single banking relationship adds strength to your application. Decide on a single credit card and perhaps one department store credit card to meet your needs. (If I had it my way you wouldn’t bother with a store credit card PERIOD) limits usually can be adjusted as well, depending on your needs, with a quick call to the bank in most cases.

How High Should Your Credit Limit Be?

Proceed With Caution

Proceed With Caution

What if you have only a few credit cards with high limits that you never use? This is not a very good idea. Make a request to the bank to have your limits reduced to a level that meets your needs, but doesn’t leave a vast amount of headroom. Of course this is different if you are running a business when you need to have a lot of headroom on your credit cards and your lines of credit. But in this scenario we are talking about personal banking. Each time you receive a letter or phone call advising you of your valued business, and your new limit, they have decreased your borrowing power in the hopes you’ll maximize your potential use of their card. If you don’t need, or use your maximum credit limit each month, reduce it to a level that’s right for you. Don’t let the card company arbitrarily increase your limits without first asking you, tying up your borrowing power on their share of your wallet.

Why Do Credit Card Companies Keep Raising My Limit When I Don’t Ask?

The credit card companies increase your spending limits arbitrarily without even calling you for many different reasons. You might have been identified as paying the credit card down regularly, and have a proven track record of being a nominal risk. This is of course bank speak when I mention “nominal risk”. Keep in mind it’s not an official increase unless you choose to use it. It is only a bank approved increase. This is why only the maximum amount of each card is reflected on the credit bureau report. Just because it’s approved for your usage, doesn’t mean you have accepted the liability. Using the increase is acceptance to the approval. You would be surprised at how many consumers – people just like yourself don’t know that. If you don’t want the credit increase, don’t use it. Better still, call the credit card company and ask them to reduce the limit to what it was before, so you are not tempted to use it impulsively.

Some credit cards have points that you collect while others offer discounts; but they all want you to carry a balance so they can earn interest revenue from you (18% a year is not unusual for CC APR). They also earn revenue from the businesses that accept your credit card as payment each time it is used whether you carry a balance or not. The business is charged a fee per transaction, often based on the dollar amount of your purchase. The larger your purchase, the larger the fee for that transaction charged to the merchant. It works on a percentage basis and that percentage varies from card to card, and year-to-year month-to-month and week to week. Raising your limit so often encourages these larger purchases, creating larger balances on your credit cards, so be very careful how you use your card.

Of course, if you are a small business owner and a particularly successful one, you can usually afford to pay off all your credit card expenditures without any problem at all, and most of the expenditures fall into the category of tax write-offs. This is a whole different scenario than we are talking about today – this is business banking 101. We will talk more about that later in this series.

carolwilliamsUntil next time, please read this information closely and then take a good look at your spending habits, your spouse’s spending habits, and the amount of available credit you both have on your cards and with your banks. Take a close look at when you make your payments for utilities, outstanding loans, and phone bills, etc.

We will see you next time on my series.

Continued in the Carol’s Borrowing Series Category of Clf.