Ari Weinberg

Take Your Own Credit Measurements

Credit card lenders are a brave bunch.

Their business of (blindly) extending credit is based on three key assumptions:

1. Consumers will take a short-term no-interest loan to make a purchase.
2. Consumers will overspend/undersave to the point that they pay interest on the loans.
3. Merchants will take a haircut to complete a sale.

As each one of these assumptions has broken down over the past few years, the industry is moving quickly to sure up its profit-taking mechanisms in the face of the Credit CARD Act. But a recent interaction with Discover brought me to reconsider how many of these lending banks make financial decisions.

On a recent statement, I expected to see a bill for $1.62. When I checked online, I had received a “small credit balance” and a zeroed-out statement. Card companies have different minimums for which they will bill. Discover, apparently, is among the highest at $2.00. Anything less as an outstanding balance, keep it. It’s not worth it.

Oddly enough, according to the customer service representative I spoke with, Discover considers the total cost of mailing a statment and receiving and processing a check when deciding to issue a credit. While I have not received a printed statement or written a check for a credit card bill in years, I can understand the analysis. Not all companies are as generous, so I’ll take the gravy.

But this experience, and a recent FiLife article, had me thinking about the opposite situation. What if I pushed the limit on the other side? Instead of buying so little that the company waives the bill, what if I maxed out every card and then just paid the minimum without reusing the cards? How long could I last?

I first did a credit card inventory. On a spreadsheet, I entered each card, its credit line and annual percentage rate (APR). You can start by getting a free credit report at annualcreditreport.com, but you’ll have to go to your card site or statement for the rate.

• Aggregate Revolving Credit Line: $118,500
• Weighted Average APR: 12.57%

That anyone in their right mind, individually or collectively, would extend an unsecured $118,500 to me is exemplary of credit card companies’ willingness to take risk. That my APR would range from 7.75% to 18.99% is even more confusing. I used weighted average in order to fully value/discount each APR by the size of its corresponding credit line.

In considering my own capital structure, these lines of credit are undifferentiated and junior to my student loans. They are all variable lines with no seniority and, theoretically, should all be priced the same.

Assuming 4% minimum payments, I would pay of this mother loan in 19.6 years. It’s a pointless figure—let’s call it Maxed-Out Credit Age—but might be an interesting exercise for consumers to take a real look at how long and far they can drive their credit.

What is your maxed-out credit age?

To find out, add up your credit lines, determine the weighted average APR and then assume a 4% minimum payment with this calculator.