Reply #48: Careful, credit card issuers are watching

[Demeter]

http://www.cmonitor.com/apps/pbcs.dll/article?AID=/20090712/OPINION/907120328/1027/OPINION01


Here's a word to the wise: Think twice before whipping out that credit card to pay for purchases at the Salvation Army or a discount store, have tires re-treaded or even buy a late-night round of drinks. Credit card companies see those purchases, and a slew of others, as a sign of real or impending financial trouble and they'll quickly cut the credit limit, raise the interest rate or even cancel the card with no warning. Once that happens the credit score that determines who is worthy of a loan and at what rate usually plummets.

In May, President Obama signed a bill that will limit some of the worst practices of credit card companies that have been raising rates with little reason and without notice and charging obscene late fees. The bill also requires that banking regulators study the practice of using information about where a person shops to assessing credit worthiness. That means credit card companies, which are already raising rates and cutting credit limits before the new law goes into effect in January, are likely to continue keep track of where and how their customers spend money until at least 2011.

Credit card companies purchase their customer's spending record from reporting companies like Equifax, which gather it by using sophisticated computer programs to "data mine" spending by individuals. The practice allows companies to develop a disturbingly complete picture of people based on not just their buying habits but also specific purchases.

Here are a few other activities that experts say could trigger a hard look from credit card issuers.

• Using a card to bail out that no-good brother-in-law, to get a massage or to employ the services of an escort.

• Charging items at auto parts or grocery stores. Both are seen as a sign of financial distress.

• Charging items at pawn shops, drug stores and shoe repair shops. All can be a warning of someone down at the heels.

• Paying for court costs, child support or alimony with a credit card.

• Charging medical care and child care.

• Charging beer, wine or liquor.

Lenders have a responsibility to assess the creditworthiness of borrowers and debtors. The failure to do that was one of the reasons the housing market collapsed and took the rest of the economy down with it. When lenders - typically an officer at a hometown bank - knew their customers that was easy to do. Today, in most cases, that's know longer possible, and like all modern lenders, credit card companies are right to make an effort to assess risk. It's also in every credit-card user's interest that they do so, since everyone pays a bit more when borrowers default on their loans.

The problem is in the ham-handed, one-size-fits-all way credit card companies and their computer programs use spending information. It makes no sense to penalize frugality. Someone who shops regularly at thrift stores despite earning a good income is certainly a better credit risk than someone who regularly runs a balance on a department store card.

Similarly, there can be lots of reasons for someone to charge groceries or use a card to pay to have a favorite pair of shoes resoled.

Depending on what federal regulators find, the use of data mining and shopping analysis could be refined, limited or perhaps even prohibited in the future. In the meantime, to protect both their privacy and their credit rating, smart shoppers, when making any purchase that might alarm lenders, should use a debit card or good old cash.

Across The Universe

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