Turns out almost $130,000 based on what this high credit IQ student has managed to do!
First for some background information. As you might know I am a huge fan of credit card arbitrage. There are two ways to do this. (a) Build up your credit slowly and accept an offer every now and then (my preferred approach) or (b) an App-O-Rama. For those of you who are unfamiliar with it, an App-O-Rama, is a word coined on the Fat Wallet Finance Forums (as far as I know) and involves applying for many credit cards in a short period of time, mostly within a day or two. Since the credit enquiries will take at least a day to percolate back into your credit history, this gives you the best chance to get approved for multiple credit cards before your credit score takes a hit. This is the approach taken by Paul, the student mentioned above to obtain almost $130,000 in credit!
Now, maybe Paul knows what he is doing. In which case, I would like to say to him, congratulations and good luck. He has plans of parking the cash in a high yield savings account and earning $600 in interest per month. That is great! But for every student like Paul who makes $600 from credit card companies, there must be a hundred or maybe thousand more that pile up $600 in credit card debt. That bothers me!
Let’s take a closer look at the credit lines Paul was approved for. The highest credit line Paul received was $25K! There were 2 more cards with credit limits higher than $15K and 6 more with credit limit in the range of $8K - $10K. Agreed that not many students are going to attempt an App-O-Rama and gain access to a large amount of cash like Paul did but each of those individual credit lines, in the wrong hands is enough to ruin lives! It might be legal for credit card companies to grant such large lines of credit to cash strapped students. But is it moral?
Sometime back Golbguru at Money, Matter and More Musings had written a (sarcastic) article saying there must be a test to qualify people for credit. I had a good laugh at it then, but now I think I agree. Here is an example of a student that Golbguru mentioned –
“I had Visa, Visa MasterCard, First Financial Bank, Visa, Gap, Target” says college senior Sara Magee. She was lured at 18 by the promise of a free Frisbee. A dozen credit cards later, she’s working three jobs to pay down $6,000 in charges, fees and interest.
“I didn’t understand interest and what a high APR was — I really just didn’t understand the concept, and it seemed like a good idea — like (I) can’t afford it now, but I will pay it off later,” she says.
Now imagine if Sara was approved for credit cards with limits more than $10K!
So what can we do? Well, the qualifier test Golbguru suggested would be a good idea, even though it might be a difficult to determine who exactly offers those tests. Here are a few other ideas -
- Parents should proactively teach children the intricacies of credit cards so they are prepared for and educated about it when it comes for them to get credit cards.
- Colleges and universities should take proactive steps to ban credit card companies from luring kids to apply for credit on college campuses.
- People should be required to use a debit card for a certain number of years before being allowed to apply for a credit card.
- People should have small *combined* credit limits for a while and prove they can make payments on time and not carry balances before being approved for larger credit lines. These days credit card companies do check whether you should be allowed credit based on your credit history, but instead of declining you credit, many just offer you more credit with higher interest rates. That to me feels predatory!
Offering $25K individual credit lines to college seniors (and $130K in combined credit lines) sends out wrong signals - that it doesn’t matter how long it will take you to pay it back or even if it will ever be possible, but here you go, enjoy it now! How long before some "party animal" college students find out about the App-O-Rama and start abusing it? Here is a excerpt from Paul's introductory post -
I wanted to be able to have an online diary where I will be updating my progress every couple of days as I try to make thousands of dollars per year just like many others have successfully done so before me. I will share the good the bad and the ugly as I take on this new project and hopefully it will help everyone out there trying to make a few extra bucks whether it’s to help pay for their college, car, hour, or an expensive coke habit :)
(emphasis on the last part of that quote by me).