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Credit Limit

The notion of CREDIT LIMIT is a cunningly contrived financial mirage to lure you into debt. I didn't believe this a while ago, but I have met enough people who have been deceived by the Credit Limit jack'o'lantern that I felt it worth writing about.

To explain the problem, let's start with the earliest, or TRUE, credit limit: the bottom of a pocket of cash! This is the zero point which is the truth. If you have a pocket with coins in, you have a reliable notion which is that after you have spent all of the money, you have none left. With this true credit limit in mind, you can be careful in your expenditure. Having this idea in mind results in good financial choices.

Whether it's loose change in a real pocket, or a huge amount of positive money in a savings account, the mathematical notion remains true, with a real zero point to work against.

This idea of a base level with which to work is almost instinctive, but it has been distorted by some credit card companies by the creation of an artificial or false "credit limit" which is an imaginary line, not at true zero, but at some negative level which the lenders feel you can cope with.

Now come on, you might say, people aren't daft! They're not going to be lured along like a donkey following a carrot on a string dangled by the rider of the donkey! But, strange as it may seem, some people do exhibit such behaviour when the credit card company gives them a credit limit. The way I've heard people talk, they seem to think that a credit limit is like free money which they are allowed to fritter away until the balance sinks to that new depth, with no notion that they will actually have to pay the money back!

As a paranoid myself I tend to suspect such things are deliberately planned, whereas sane people assure me it's actually just an innocent accident. Yes, that'd be it, just very convenient that a false bottom be put down like an elephant trap where folks imagine the floor is.

Well here's the truth: a "credit limit" is an arbitrary line set by a money lending company, an illusion, and it is not true zero. It's not real money, until you need to pay it back, and then it's frighteningly real, and you've got the problem of how to get out of debt. So, the thing to do, to avoid being fooled by the financial mirage, is to consider the true zero to be at the point where you have paid all your debts and owe nothing. Only then can you build a positive balance. On this basis I say you should have a bank account, and you should try to work towards having an increasing amount of savings if you can, on a permanent basis. In contrast, borrowing money on a loan or on credit cards should be a temporary arrangement.

The practicality involves a way of thinking, but the concepts have real ramifications. When you see your credit statement, think about how much money you actually owe (how far below zero you are), not how far above your credit limit you are.

The return to real money can be seen with the introduction of pre-paid cards, which have the advantages of being able to buy stuff online, but there's a true zero line like cash, and no debt or credit limit problem.

Update: One credit card in particular did not reward a customer well for being careful with money. Because the customer conserved their available credit-limit and didn't spend the money, the credit card company reduced the credit limit and then cancelled the card. This again shows the artificial nature of credit limits, and the fact that they are also... unreliable. If you're wondering which credit card is being mentioned, it's Halifax Mastercard