What policy actions might be appropriate for governments to take with regard to credit limits?
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Credit limits are very important in consumer credit especially if it is installment credit. The ratio of debt to credit and ability to pay are crucial. Suggestions would be to limit credit use or debt can spiral out of control. Pay off the credit card each month if possible or pay off the one item so that it is yours before using credit for another. Don't get into using one credit card to make payments on another. If decisions are to be made about someone else's request for credit, look at the number of credit cards already, the balances on each, the frequency of use, the number of late payments, and the number of inquiries for credit made. Relate all of these to income, decide if the application is worthy of credit at all, and start with small limits. Limits can always be raised if the person proves to be a good credit risk.
Access to credit is a very difficult area for the government to regulate. On the one hand, consumers can be badly harmed by predatory lending practices. When firms that issue credit cards give consumers credit limits that are too high, the consumers can get themselves caught in a vicious cycle in which they incur too much debt and are stuck with huge interest payments. This is clearly something that the government would like to prevent. On the other hand, credit is very important for American consumers. If the government is too strict, it may prevent people who are poor from obtaining the credit that they need. The government might be punishing poor people who use their credit limits to their advantage. This makes it difficult for the government to regulate in a way that will protect some consumers without harming others.
It might be possible for the government to craft some sort of rules that use consumers’ incomes and credit histories to set upper credit limits that credit card companies can offer. These regulations could require credit card companies to set relatively conservative credit limits that would increase with a consumer’s income. However, those limits could be increased if a given consumer had a particularly good credit history and good credit scores. The lower credit limits might protect consumers from excessively high credit limits while the possibility of increases in the limit would reward those who would be good risks even at a relatively low income.
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