Behavioral Profiling - The Latest in Credit Card Shenanigans

Jan 30th, 2009 | By Rob | Category: Credit Cards

If you go back a few years and start reading articles on how to act responsibly with your credit, you’ll see similar advice as what you see today:

Pay off your card every month.

If you carry a balance, make additional payments on the credit card with the highest interest rate first.

Make more than the minimum payment on credit card debt.

Use a low interest rate balance transfer to stop paying higher interest rates.

Don’t close your credit card accounts.

Don’t use more than half of the maximum credit on your credit cards.

However, today’s economic environment may be rewriting the rules and change credit card advice in the future. A few off the top of my head that I have seen recently:

Use your credit card account every month, as creditors are closing inactive credit cards on their consumers in order to reduce their total exposure to the credit crisis.

Don’t change the amount of money that you repay or the date that you repay it, as it could indicate that you are having trouble meeting your financial obligations.

But the latest piece of advice to be added may be the worst for what it says about how banks are handling themselves amidst this crisis: Don’t spend money where people with financial problems are spending their money.

A Good Morning America story and subsequent New York Times article highlighted this story from the Atlanta Journal-Constitution that warned consumers about the latest attempts by credit card companies to predict who will default on their credit card debt. It is believed that one or more financial institutions is engaged in behavioral profiling. They are evaluating your finances by the stores where you are making your purchases. If other shoppers in that store are showing a higher than normal incidence of financial problems, then they assume that you are more likely to default on your credit card debt in the future as well.

There is more than enough evidence to conclude that credit card companies are engaged in behavioral scoring on a widespread basis.

As evidence of this, American Express apparently sent out a letter to some consumers for whom it was cutting their credit that said, “Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”

Last year, banks began reducing lines of credit on a geographical basis, believing that consumers in Florida and California were not in as good of financial position as they had been when their real estate market was booming and home values were increasing.

And Compucredit settled in December 2008 (without any admission of wrongdoing) allegations that it reduced credit scores of consumers based on their spending habits after advertising that their credit cards could be used anywhere.

So, to the long list of other debt advice to give to consumers, we’ll now see: Don’t act like a poor person. Don’t live where poor people live and don’t spend where financially troubled individuals shop.

Thanks, credit card companies!

At a time when consumers are trying to conserve cash and cutting payments on their credit cards, and credit card companies are going to war against losses, it’s more important for the federal government and consumers to be vigilant about what banks are doing and take a stand about actions which we as a nation do not agree with. It’s just one more reason that there’s plenty of room for Congress to enact a Credit Card Bill of Rights which goes beyond the new credit card rules adopted by the Federal Reserve.

Oh, and for the 2% of the population that follows their credit score religiously and thinks that credit card companies have historically done a good job of predicting who will have financial problems, I’d like to remind you that Fair Isaac is rolling out the changes (known as FICO 08) in the formula behind its credit scores in order to, supposedly, increase its accuracy. Apparently, the old system penalized individuals with one time late payments too much and people making late payments chronically not enough. So some of us will see our credit score go up or down by about 20 points. Sounds like just another excuse to cut credit lines and increase interest rates! I sure hope I get a letter that says, “We’re sorry that we underestimated the strength of your financial position. Here’s a decrease on the interest rates on your credit card.”