Why is it possible to just take out a ton of credit cards, max them out and default in 7 years?
"Well, primarily because that's fraud and fraud prevents a debtor from receiving a discharge in bankruptcy court.  Fraud would be pretty easy to prove if you didn't have an income change and you have several lines of credit opened on and around the same day with almost no payments made toward them.  Additionally, thanks to the reforms of the bankruptcy code, if your income exceeds the median income of your state you'll be forced in to a Chapter 13 and committed to a repayment plan that allocates all of your ""disposable income"" to your creditors. Now if whoever posted that will attempt to simply not pay then negotiate repayment plans with their creditors the process will last far longer than 7 years.  It takes a long time to be in default for enough time that a consumer creditor will negotiate the debt and this is assuming the creditor doesn't sue you and get a judgement which could apply liens to any property you may own.  The judgment(s) will likely cause you to pursue bankruptcy anyway; only now you're at least a few years beyond the point at which you ruined your credit." It may become difficult to rent a car or a hotel room. It may affect your ability to get a job. Some employers now check credit reports and disqualify candidates with a poor credit report. It may affect your ability to get a security clearance or professional bonding. It may affect your ability to find housing. Many landlords check credit reports. You may be harassed morning, noon, and night by collection agencies. This can be theoretically solved by declaring bankruptcy, but the bankruptcy court may force the sale of some of your assets to make payments towards your debt. I should apply for everything I can on the same day, get approved for as many as I can First it may not sound as easy. You may hardly get 2-3 cards and not dozens. Even if you submit the applications the same day; If you still plan this and somehow get too many cards, and draw huge debt, then the Banks can take this seriously and file court case. If Banks are able to establish the intent; this can get constituted as fraud and liable for criminal proceedings. So in short if someone has the money and don't want to pay; the court can attach the wage or other assets and make the person pay. If the intent was fraud one can even be sent to jail. The U.S. bankruptcy laws no longer make it simple to discharge credit card debt, so you can't simply run up a massive tab on credit cards and then just walk away from them anymore.  That used to be the case, but that particular loophole no longer exists the way it once did. Further, you could face fraud charges if it can be proven you acted deliberately with the intent to commit fraud.   Finally, you won't be able to rack up a ton of new cards as quickly as you might think, so your ability to amass enough to make your plan worth the risk is not as great as you seem to believe. As a closing note, don't do it.  All you do is make it more expensive for the rest of us to carry credit cards.  After all, the banks aren't going to eat the losses.  They'll just pass them along in the form of higher fees and rates to the rest of us.
Another reason is that the amount of unused credit you have is a positive factor on your credit score.  It's generally easier to open several different accounts for $X dollars each with different banks than to get your current bank to raise your limit severalfold in a single go.  Your current bank has to worry about why you suddenly are asking for a large additional amount of credit; while other banks will be willing to offer you smaller amounts of credit in the hope that you transfer your business from your current bank to them. It's a business decision for a lot of people.  You can either be stuck with the debt for the rest of your life, or you can default, settle for a much smaller amount, and ride out the 7 years that it will be on your credit. I'm not sure if someone else answered already in the same manner I will. I can't guarantee for sure if it's the same in the U.S.A. (it might since major credit cards companies like Visa/MC/AMEX are American companies) but in Canada having/keeping unused CC is a disadvantage because of the following: Banks and financing companies look more at the total amount of credit available to you than at how much purchases you have on your cards. Ex: Let's say that you have the following: - Visa cc with $10,000 limit and $2000 worth of purchases (made more than 30 days ago) on it. - Mastercard cc with $10,000 limit as well and $1000 worth of purchases (less than 30 days old) - A major retail store cc with $2000 limit and $0 balance. Hypothetical situation: You want a bank loan to do some expensive house repairs and are looking for a lower interest rate than what your cc can offer. The bank will not care about the amount on the cards. They will add-up all the limits of your cc and treat your loan request as if ALL your cards were filled to their respective limit.  So in this case: they will consider you as being right now in debt of $10K+$10K+$2K = $22,000 instead of only $3000 and they might:  1. refuse you the loan 2. grant it only if you transfer all purchases on a single card and cancel all the others. 3. Once the $3000 is transferred on one of the cards (and the others cancelled), they can require that you reduce the limit of that card. Hope this helps! There is one massive catch in this which I found out when I went to Nationwide to ask for a loan. I've got a credit card which they kept increasing my credit limit, it's now at something ridiculous - nearly £10,000 but they keep increasing it. I never use that card, when I went to Nationwide though they said they couldn't give me a loan because I had £10,000 credit already and if I reduced this credit this would affect my credit rating and they could potentially give me a loan. I then realised what MBNA had craftily done.  I have two cards with this bank, one with really low interest and the other with really high interest (and a high credit limit) - even though the other card has a zero balance loan companies still see it as money I could potentially go and spend, it doesn't matter to them that I've not spent any money on that card in about 12 months, to them it's the fact that they could give me a loan and then I could go and spend another £10,000 on that card (as you can see extremely risky).   Of course this means that what MBNA are craftily doing is giving me such a high credit, knowing full well that I'm not going to use it, but it also prevents their competitors from offering me a loan, even at a lower rate, because I've already got too much credit available. So yes there is a catch to giving you a high credit limit on your cards and it's to prevent you from either leaving that bank or getting a lower interest rate loan out to clear the debt. Assume that he reformed his ways. He stopped the destructive behavior (gambling) and had enough money from a job going forward to pay for all his future expenses. Then it is true the old debts will fade away both as being collectable, and as a source of a negative mark on the credit report. Also assume that the people or companies never figure out that the the relative has a steady source of income, also assume that all the debts can be forgiven and have no long lasting impact. If any of those assumptions aren't true the plan won't work. The trail of debts will continue to grow, and may have additional complications. As debts fall off the radar, they may be replaced even faster by new threats. Many a person has used a debt consolidation loan, or a home equity loan to pay off all the credit cards; but found themselves back in trouble because they never fixed the underlying problem: they spend more than they make. In the case of a home equity loan they put their house at rick, as a replacement of unsecured loans. If the gambling continues, the lack of payment of old debts becomes a crutch for the ability to generate new debts. First of all debt is a technology that allows borrower to bring forward their spending; it's a financial time machine. From borrowers point of view debt is good when it increases overall economic utility.  A young person wants to bring up a family but cannot afford the house. Had they waited for 30 years they would have reached the level of income and savings to buy the house for cash. By the time it might be too late to raise a family, sure they'd enjoy the house for the last 20 years of their life. But they would loose 30 years of utility - they could have enjoyed the house for 50 years! So, for a reasonable fee, they can bring the spending forward.  Another young person might want to enjoy a life of luxury, using the magical debt time machine and bringing forward their future earnings. They might spend 10 years worth of future earnings on entertainment within a year and have a blast. Due to the law of diminishing marginal utility - all that utility is pretty much wasted, but they'll still will need to make sacrifices in the future. The trick is to roughly match the period of debt repayment to the economic life of the purchase. Buying a house means paying over 30 years for an asset that has an economic life of 80 years+, given that the interest fee is reasonable and the house won't loose it's value overnight that's a good debt. Buying a used car with a remaining life of 5 years and financing its with a seven years loan - is not a good idea. Buying a luxurious holiday that lasts a fortnight with 2 years of repayments, i.e. financing non-essential short term need with medium term debt is insane. The other question is could the required utility be achieved through a substitute at a lower cost without having to bring the spending forward or paying the associated fee. Most credit cards will allow you to pick the closing date. In fact almost every bill with the exception of utilities that collected usage by reading a meter at the house will either let you pick the closing date each month, or at least have several to pick from. They won't let you pick the length, but they will let you pick the day of the month. When I worked a job that paid once a month. I wanted all my bills due early in the month: get paid, pay bill, know how much I have left. When I went back to every other week spreading them out made more sense. No credit card had a problem with this. The transitional cycle was not the correct length, but after that it was fine. As Dheer pointed out extending the cycle to 90 days would involve them extending credit for much longer than they would be comfortable. Also the goal of keeping utilization under 30% would be very difficult, you would have to keep your spending per month to less than 10% of your credit limit. Some people have trouble not falling behind on credit card bills, having to set aside the money to pay the bill every 90 day may be way to tough for many people. It could be a a way to preserve the value of your money, but depends upon various factors. If a country defaults, and it leads to hyper-inflation, by definition that means that money loses its purchasing power.  In even simpler terms, it cannot buy as much tomorrow as I could today. Therefore people can be incented to either hoard physical goods, or other non-perishable items. Real-estate may well be such an item.  If you are resident in the country, you have to live somewhere.  It is possible that a landlord might try to raise rent beyond what your job is willing to pay.  Of course, in a house, you might have a similar situation with utilities like electricity... Assuming some kind of re-stabilization of the economy and currency, even with several more zeros on the end, it is conceivable that the house would subsequently sell for an appropriately inflation adjusted amount, as other in-demand physical goods may. Lots of variables. Good Luck. This can mean a few things to me.  Some of which has been mentioned already. It can mean one (or all) of the following to me: You take out a new credit card and transfer ALL other credit balances to it. (Only good if you destroy the others, this is a 0% offer, AND you plan on paying this card off furiously.) You do the loan thing mentioned earlier. You go to a credit consolidation service who will handle your paying your payments and you send them one payment each month.  (Highly discourage using them.  A majority of them are shady, and won't get do what they say they will do.  Check Better Business Bureau if you find yourself considering them as an option.) In the first two cases, you are just reducing the number of hands reaching into your bank account.  But keep in mind, doing this is not the same as paying off debt.  You can't borrow your way out.  You can do this as part of your plan, but do so CAREFULLY. It does make sense to combine debts and pay off the worst (highest interest rate). However, if you can't get any loan, you should focus on the worst debt and pay that off. Then take the same amount of money you were paying to the next worse debt, and so on until you're clean. Let's look at an example. Debt A is at 5%, Debt B is at 10% and Debt C is at 15%. You are paying AB and C. On a monthly basis, you save 100€ to pay off C. Once C is payed off, you keep on saving 100€ and add whatever you were paying to Debt C to those savings. This way, you can pay off Debt B at an increased rate. When B is cleared, you save 100€ + whatever you were paying to Debt B and Debt C to clear Debt A. That's the theory. Think about the credit card business model... they have two revenue generators: interest and fees from borrowers and commissions and fees to merchants. The key to a successful credit card is to both sign up lots of borrowers AND lots of merchants. Credit card fortunes have improved dramatically since the 1990's when formerly off-limits merchants like grocery stores began to accept cards. So when a credit card lets you just pull cash out of any ATM, there are a few costs they need to account for when pricing the cost for such a service: Credit card banks have managed to make cash advances both a profit center and a self-serving perk. Knowing that you can always draw upon your credit line for an emergency when cash is necessary makes you less likely to actually carry cash and more likely to just rely on your credit card. Because even if you won the lottery, without at least some credit history you will have trouble renting cars and hotel rooms. I learned about the importance, and limitations of credit history when, in the 90's, I switched from using credit cards to doing everything with a debit card and checks purely for convenience. Eventually, my unused credit cards were not renewed. At that point in my life I had saved a lot and had high liquidity. I even bought new autos every 5 years with cash. Then, last decade, I found it increasingly hard to rent cars and sometimes even a hotel rooms with a debit card even though I would say they could precharge whatever they thought necessary to cover any expenses I might run. I started investigating why and found out that hotels and car rentals saw having a credit card as a proxy for low risk that you would damage the car or hotel room and not pay. So then I researched credit cards, credit reports, and how they worked. They have nothing about any savings, investments, or bank accounts you have. I had no idea this was the case. And, since I hadn't had cards or bought anything on credit in over 10 years there were no records in my credit files. Old, closed accounts had fallen off after 10 years. So, I opened a couple of secured credit cards with the highest security deposit allowed. They unsecured after a year or so. Then, I added several rewards cards. I use them instead of a debit card and always pay in full and they provide some cash back so I save money compared to just using a debit card. After 4 years my credit score has gone to 800+ even though I have never carried any debt and use the cards as if they were debit cards. I was very foolish to have stopped using credit cards 20 years ago but just had no idea of the importance of an established credit history. And note that establishing a great credit history does not require that you borrow money or take out loans for anything. just get credit cards and pay them in full each month. Cancelled cards don't fall off the system for a long time, up to ten years. Card terms change, with notice of course, but it can happen at any time.  I had a card with a crazy perk, 5% back in Apple Gift cards. This was pre-iPod days, but it was great to get a new computer every two years for free. But it was short lived. Three years into it, the cards were changed, a no-perk card from the bank. That is now my oldest account, and it goes unused.  Instead of holding cards like this, I wish I had flipped it to a different card years ago. Ideally, your mix of cards should provide value to you, and if they all do, then when one perk goes away, it's time to refresh that card.   This is a snapshot from my report at CreditKarma. (Disclosure, I like these guys, I've met their PR folk. I have no business relationship with them) Elsewhere on the page it's noted that average card age is a 'medium impact' item. I am 50, but I use the strategy above to keep the cards working for me. My current score is 784, so this B on the report isn't hurting too much. The tens of thousands I've saved in mortgage interest by being a serial refinancer was worth the hit on account age, as was the credit card with a 10% rebate for 90 days, the 'newest account' you see in the snapshot.  In the end, the score manipulation is a bit of a game. And some of it is counter-intuitive. Your score can take a minor hit for actions that would seem responsible, but your goal should be to have the right mix of cards, and the lowest interest (long term) loans. You are right in saying that you cannot go over limit on (most) credit cards, however, with a debit card the majority of banks will extend an overdraft to you if your account goes overdrawn (less than 0). The amount of overdraft extended will depend on your credit rating and standing with the bank and may not be extended if they think that the amount is too large or that you are a credit risk. The drawbacks of overdrafts are that they are very expensive usually having a fixed fee for going into overdraft and charging a high rate of interest. If this overdraft has not been prearranged with the bank these costs are usually much higher. "After this happened the second time, I wonder if there could be a ""catch"" on this.  No I mean, what is my bank's real motivation for allowing me to spend more money.  Credit card companies make money in a few ways. By giving you a higher limit the credit card company hopes you will spend more on the card. This immediately gets them more merchant fees and if they are lucky means you will have to carry the balance for a while earning them interest. If they get really lucky you will miss a payment or two earning them some fees. Of course if they let you borrow too much you might never pay it back. So the credit limit is a balancing act. Letting you borrow more money gives them the potential to make more money but also the potential to lose more money. As you build up a history of paying as agreed they feel comfortable lending you more money."