I submitted the application online. The questions were as expected: name, address, Social Security Number, employment information, income, size of the credit line requested, and the purpose of borrowing. They said a decision typically takes two business hours. I waited all day but I didn’t hear anything. I finally called and they said my application was declined! If you can believe it, they asked me if I would like to be referred to Wells Fargo Financial, their subprime unit. Me? Subprime? No, thank you.

The underwriter said the reason for the decline was that the size of the credit line I asked for was too high for my income. Fine, tell me what you can give me. No, they just flat out declined me. It’s been widely reported that credit card companies are cutting people’s credit limits. They have spared me so far. Ah, the credit crunch finally hit me.

Because having a line of credit linked to a checking account is part of my carefully designed strategy for emergency-proofing my emergency fund, I swallowed my ego and pride and had a phone rep appeal my case with the underwriter. After a few rounds of phone calls, I finally got it approved with the lowest credit line they can give to anybody for that product. It’s an acceptable starting point. I can have them raise the credit limit later after the credit crunch passes.

The phone rep told me the underwriter couldn’t give me a higher credit line because I already have plenty of credit available to me from my three credit cards. The underwriter said if I were to max out on all my credit cards, the required payments would be too high for my income. That actually makes sense, although the credit limits on my three cards are quite modest compared to what others said they had. Perhaps that’s the reason none of the credit card companies cut the credit limit on my cards. I see fellow blogger Sun has over $200,000 combined credit limits from 9 credit cards. When I asked How Long Can You Live On Your Credit Cards? last January, a reader said he or she could live six years just on credit cards. I can live only six months on my credit cards. Those credit card companies are much more trusting than my Wells Fargo underwriter. Maybe the conservative nature of Wells Fargo is a reason why Wells Fargo is a relatively strong bank.

Everybody says you should have your credit limits as high as possible to keep your utilization ratio low and your credit score high. This experience shows that having high credit limits can prevent you from getting new credit elsewhere. Because I just refinanced my mortgage, I saw my credit scores (790). I know they declined me initially not because of my credit scores. It’s an issue of maximum potential debt to income ratio.

For my low credit line, I also had to fax in a bunch of documents: W-2, paystubs, and utility bill. I never had to do it before for any credit card application. It’s a small inconvenience for me to gather the documents and fax them, but I think all credit applications should be done this way. Applying for credit is a serious business. We shouldn’t make it too easy. I do wonder why a personal line of credit is so much more difficult to get than a credit card. A personal line of credit is treated as a real loan and looked at by a real person. Credit card applications are typically decided by automated systems with instant approval. Professor Adam Levitin of Georgetown University wrote in his blog post Credit Card Defaults–Piggybacked Underwriting:

"There is virtually no income verification in the [credit] card industry–all loans are stated income loans (a/k/a liar loans), and we know how well that worked for mortgages (and there’s more temptation to lie about a card as a default won’t cost you the house)."

I don’t know why they do full doc loans for a personal line of credit while they do stated income loans for credit cards. I’m guessing it’s because with a credit card they can price for risk and adjust rates more easily down the road. If any banker reads this, please chime in.

After all these run-ins with the bank, I’m thinking what it takes to establish a relationship with a personal banker at a branch. Instead of calling different departments at different 800 numbers, getting a different phone rep every time I call, and repeating what I said each time, I could let the banker at the branch make the calls for me. I heard that’s how banking was done in the old days. A local banker knew you and served you. Now everybody self-serves online or calls the call center a thousand miles away or across the globe. I know Wells Fargo is known in the industry for relationship banking. Getting help from a banker for a single point of contact will probably make things easier for me. I will inquire when I go into a branch next time.

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Two years after I canceled oldest credit card and lowered my total available credit limit by about 25%, my credit scores are still going strong. They changed very little since I looked at them a year ago.

The lender also sent me a combined credit report from all three credit bureaus. All the open accounts are reported correctly. There are no suspicious entries. The report also shows many more closed accounts. They are all marked as "account closed at consumer’s request."

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• Closing Oldest Credit Card Did Not Hurt My Credit Scores
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"Here’s how Pete got punished. Without warning, the credit card companies slashed his credit limits. This even though he kept up his payments as he always had. With lower limits, his card balances instantly shifted from making up 20 percent of his available credit to 80 percent. Suddenly, Diebel looks like a guy who’s living off his plastic. His FICO score dropped 10-points [sic]. That may sound miniscule on a scale of 300 to 850, but it could translate into thousands more in interest payments."

OMG. His FICO score dropped 10 points! Big deal! It could translate into thousands more in interest payments! Are you serious? Or is that subtle word could rearing its ugly head again?

I don’t know what my FICO score is right now. I can’t care less. Whenever I refinance my mortgage, I have them send me the credit reports and credit scores they pulled. That’s all. During all these years, my FICO score must have dropped and gained 10 points many times. It never bothered me. What should Pete Diebel do when the credit card companies slashed his credit limits? Pay off the balance, or apply for new credit. If he can’t do either, he not only "looks like a guy who’s living off his plastic." He is living off his plastic.

After reading the Wikipedia entry on credit score, I like the Swedish system the best:

This system aims to find people with bad payment attitude. It has only two levels, good and bad. Anyone who does not pay a requested debt payment on time, and also not after a reminder, will have their case forwarded to the Swedish Enforcement Administration (Swedish: Kronofogdemyndigheten), a national authority which collects debts.

… …

If one gets a request by the Enforcement Administration to pay, it is possible to object to it. Then the one requesting the payment must show the correctness in the court. Failure to object is seen as admitting the debt. If the debtor loses the court trial, the court costs are added to the debt, and the Enforcement Administration fee also. Taxes and authority fees must always be paid on request unless payment has already been made.

How about that? Only two levels: good and bad. A national authority that collects debts. I bet people are very good about borrowing money and paying their bills in Sweden.

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Software picked, likely related articles at The Finance Buff:

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I hear a lot of buzz about the credit score and I don’t understand what the hype is about. After reading this book I still don’t understand why people think everybody should care about what their credit score is and everybody should manage their financial affairs around how the credit score is calculated.

The book gives information on what the credit score is, how it is used, what factors influence the credit score calculation, and how to improve your credit score if you have a bad one. Then it also says:

“You don’t need to have the very highest score to get good credit. Any score over 720 or so is going to get you the best rates and terms with the vast majority of lenders. You’ll have all the credit you need, and then some.”

Bingo. 720 is the average credit score for all population in the United States. I think it’s worth repeating: if you have an average credit score, you will be able to get the best rates and terms with the vast majority of lenders.

It turns out that people who have above average scores don’t have to worry. Use a few credit cards if you want to. Pay your bills on time. Don’t carry any balance. Use common sense. That’s it. I don’t know how much money is wasted by consumers who are scared into buying their credit score from the credit bureaus.

Rating: *** (average). If you have below-average credit, read it, otherwise, skip. You won’t miss much.

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Software picked, likely related articles at The Finance Buff:

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