Here's what a credit crunch is...

[Mr. Bloom]

Mr. Silver - Alive and Kickin' in Indiana! This is the third time in my 20+yr career that I've dealt with the "business" cycle, so I keep things in perspective.

It's like driving in a snowstorm...you trust your abilities, but it's the other crazies on the road that concern you...

Ok, I understand all the basics of all of this but my question goes to what smilingcat had to say.

On your last post you say that if you pay off your credit card-no matter what the balance is-they(the company) will cancel it for no apparent reason? This seems a bit strange to me. That or I am not understanding this fully. Why not reduce the amount that can be used-or something to that effect?

Red Rock

My favorite quote from "Out of Africa":

Those darned bankers. Always running to give you an umbrella on a sunny day, but when the clouds come, they want their umbrella back

It is counterintuitive, but here's a simple explanation:

- Banks have to maintain reserves (aka capital) for each loan they make even if you don't use your availability.
- If you have a $20,000 credit card, they are likely maintaining an $800 reserve (4% of the unused availability...and more on the balance outstanding)
- Banks want to make a return on their capital. For a credit card, that's north of 20% - in this case, $160 (it's likely much more, but I'm keeping it simple).
- If you don't use your card, they're not getting a return on capital. (although, if you use it a lot and pay it off each month, they don't get interest, but they get the substantial fees the merchants pay...and that counts). I'm sure RunningMommy will attest to that being A LOT!
- So when credit is tight and they can't fund their needs, they ration availability to the most profitable customer...because they exist to make money.

Hope that helps.