It was a brief segment on NPR’s Marketplace last month that alerted me to the newest scary thing about credit cards: banks have begun to curtail or withdraw credit based on where you shop and what you buy.
Here’s one example: consumer Kevin Johnson had his credit line slashed by two-thirds despite a stellar credit score (764) and a flawless history of on-time payments. Why? Because “… other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”
Excuse me?
Analyzing his recent purchase history, Kevin came to suspect that Wal-Mart was the ‘establishment’ in question, but couldn’t get anyone at American Express to confirm, deny, or elaborate on their message.
A May article in the New York Times entitled “What Does Your Credit-Card Company Know About You?” shows just how absurd this has become (emphasis mine):
Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments. Are cardholders suddenly logging in at 1 in the morning? It might signal sleeplessness due to anxiety. Are they using their cards for groceries? It might mean they are trying to conserve their cash. Have they started using their cards for therapy sessions? Do they call the card company in the middle of the day, when they should be at work? What do they say when a customer-service representative asks how they’re feeling? Are their sighs long or short?
Information about exactly what businesses and purchases count against you is a closely guarded secret. The only specific data I have been able to find was in a single lawsuit filed by the Federal Trade Commission last year which cites one Visa card issuer for “an undisclosed ‘behavioral’ scoring model that penalized consumers for … cash advances and transactions with the following types of merchants”:
- Direct marketing merchants
- Marriage counselors
- Personal counselors
- Automobile tire retreading and repair shops
- Bars and night clubs
- Pool and billiard establishments
- Pawn shops
- Massage parlors
According to Marketplace, “splurging looks bad, and … scrimping looks bad”:
“Say Mr. Good Credit rewards himself with a rare trip to the spa? His card company might think he’s trying to relax because he’s stressed about money. And what if he decides to go bargain hunting? ‘Oh my gosh, maybe you’re about to lose your job. You’re starting to downscale to lower-cost stores.’”
Yes, even frugality can be considered a warning sign; one analysis found that “people who bought cheap, generic automotive oil were much more likely to miss a credit-card payment than someone who got the expensive, name-brand stuff.”*
What can you do? Not much. You can avoid or pay cash for suspected red-flag items like alcohol or therapy. But we are playing a game where the rules are not just secret but constantly shifting, and a behavior that’s innocuous today may be blacklisted tomorrow. “Many people don’t understand how almost every transaction they make today could trigger a readjustment in bank analytics,” says credit-card expert and consumer advocate Dr. Robert Manning.
At left: a six-minute segment on Good Morning America that aired this past January, profiling Kevin Johnson’s situation and the growing data-profiling problem.
Previously: credit cards part one and part two.
Next, in part four, I’ll cover the good news and the bad news about the recently passed CARD legislation. And finally, in part five: my personal response to the mess.
*(An aside: I buy a lot of generic groceries, and know that it only rarely makes a difference in quality, but I know very little about generic as applied to motor oil. I called my brother-in-law Bill, who owns and runs a car repair shop, to find out whether expensive name-brand oil is actually any better than cheap generic oil. His answer, in brief: it’s a gamble; 9 times out of 10 generic is the exact same oil, rebranded. That tenth time, though, you’re getting crap, and your car can suffer. Interestingly, in that brief conversation I learned enough for two whole posts on automobile frugality. Expect to see a lot more about cars on Pocketmint in the future as I tap this familial resource!)
(Photo by mjb84.)
The first of my two guest posts is up at Get Rich Slowly. GRS has long been my favorite personal finance blog, and was one of the main inspirations for Pocketmint. (Which is sort of a neat karmic circle, since JD credits my online personal journal of twelve years ago as the inspiration for his own web writing.)
“A visit to the Island of Misfit Foods” is today’s topic: how I set my food snobbery aside and learned to love Grocery Outlet. If you enjoy the post and would like to see more from me, let JD know in the GRS comments. (These articles are ‘audition’ pieces for a regular writing gig over there. There are six other very strong candidates however, so I’m trying not to hold my breath.)
For those of you coming from Get Rich Slowly, welcome! Feel free to poke around in the tags in the sidebar at right for other posts of interest here on Pocketmint, or subscribe to the RSS feed. I also post to Twitter and you’re welcome to follow me there, but it’s a personal account where I talk about everything, not just personal finance.
My fingers seem to be healing, so maybe the worst is over. I hope to return to ten-finger typing — and more Pocketmint posts — soon.
This is just a short note to apologize for the posting delay; I’m suffering from a medical condition that most days leaves me only able to use one hand. (If you’re curious, I go into more detail on my personal blog.) What typing I’ve done has been for two guest posts I promised; they’ll air in August.
I’ll be back to Pocketmint as soon as I can … think me up some cooler weather, ’kay?
As I mentioned in part one, for the last two years Jak and I have been using a single credit-card account, a Costco Amex card with cash-back rewards, for all our credit-card needs. (When a merchant doesn’t take American Express, we use the debit MasterCard for our joint checking account.)
This makes record-keeping easy. At the nadir of our debt we had nine or ten cards between us, which makes for a lot of due dates to track every month. As you might expect, we missed several deadlines over the years.
Now I only have to monitor the balances of two accounts, and worry about one monthly due date. We pay the full balance on the Amex card every month, so never incur fees or interest charges.
I’m very happy with this system. Except for one thing: it’s trashed my credit score.
I confess that once I’d paid everything off I stopped even tracking how many lines of credit I had open. I used to know them by bank, so there would be the Providian card, the First USA card, the Citibank card, etc. But those darned banks keep eating other banks, and the names wouldn’t stay the same. We started out with one Chase account each; four years later we had six (or maybe seven?) different Chase cards, which I could no longer tell apart. J.P. Borgan Chase!
To make matters worse, I’ve never been very happy with Chase, after a couple of predatory ‘gotcha!’ stunts like moving our due date up by a week without warning. I had no intention of using any of those cards ever again, but I left them alone because I knew that closing lines of credit can drop your credit score.
Then in the spring of this year Jak and I began to receive notices that one card or another had been closed due to inactivity. At first it was a surprise; in nearly twenty years I’ve never before had a bank close an account because I wasn’t using it. Previously they’ve just tried to woo me back by sending more ‘convenience checks’ and offering temporary low interest rates. The Wall Street Journal explains this shift in strategy: “As credit-card delinquencies rise, closing inactive accounts helps companies reduce their exposure to risky credit holders. Issuers close credit lines … if the card holder is deemed unprofitable, which is essentially the case when the card goes unused.”
I hated the idea of juggling purchases across multiple cards again, and decided not to change my behavior in hopes of stopping any other closures. It was a partially emotional decision rather than a strictly logical one, but for me the potential score drop wasn’t worth the effort and increased risk of screwing up.
When I got the termination letter from Discover, however, I had a sharp pang of regret. That was the first credit card I got in college; when it closed my ‘credit history length’ dropped from 19 years to just 2. I don’t have clear before-and-after credit scores, but since history length accounts for roughly 15% of your score, I figure that had to hurt.
I called Discover to find out if the account could be reopened. No dice; I was offered a new account, but of course that would do nothing for my ‘length of credit history’ number. They wouldn’t budge on reopening the one I’d had for nearly two decades.
This week I pulled credit reports and took stock. Jak still has three Borgified Chase accounts active (my guess is that Chase realizes that he’s still employed full-time and I’m not); I have just the one Amex card open.
Honestly, I prefer it this way. Despite my brief worry that I’d done the wrong thing by not saving the Discover account, I feel relieved to be done with all the extra cards. I have a sense of freedom and control that was missing before.
Still, it was not without cost. If we ever apply for another mortgage, the credit score will matter. It might even be making a difference right now in our car insurance rates, or in job applications.
If you’re concerned about having the highest possible credit score, you should pick the one or two cards that you’ve had the longest and make sure to put a purchase on them every few months. There’s no guarantee that they won’t be closed anyway — issuers can close an account at any time for any reason — but it improves your odds.
The bad news is that making purchases on your credit cards carries a whole other set of risks — sort of a ‘damned if you do, damned if you don’t’ scenario. I’ll cover those in part three.
(Photos by Andres Rueda and jessemoya.)
I’ve just about had it with credit cards.
Like most people of my generation, I got my first card in college. Then, and for the next twenty years, getting credit was deceptively easy. I used it in all the typical foolish ways: to pay bills during periods of unemployment, to finance an unsustainable small business, to live beyond my means.
In early 2007, after more than a year of concerted effort and lifestyle changes both major and minor, my partner and I paid off the last of our credit cards. (We still have the original mortgages on our house, but have never rolled outside debt into that loan.) I swore then that I would never carry a balance on a credit card ever again. And I haven’t.
But I do still find it useful to charge purchases to a single card, paid in full each month. Here’s why:
- Purchase tracking — This is the big one, as any attempt to budget or control spending relies on it. No matter how diligent I try to be with recording my cash transactions, I still miss one from time to time — and never mind tracking my spouse’s cash, that’s like trying to catch raindrops with my tongue.
- Overdraft protection — I try to keep a minimum cushion in the checking account and everything else in savings, where it earns interest. Putting purchases on the credit card instead of debit frees me from constantly monitoring our available checking account balance to prevent stiff overdraft fees.
- Cash-back rewards — Our Costco AmEx card gives us a tiny percentage back (1-3%) on purchases. Last year it was just over $500 — not exactly chump change. This year we’re spending less, so the total amount will drop, but even so: 1% > 0.
- Vehicle insurance — On the rare, rare occasion when I need to rent a vehicle (which hasn’t happened in the last two years, but no doubt will at some point), the extra insurance provided by a credit card saves me money.
The problem? Now that I’ve mended my profligate ways, the credit card companies no longer consider me useful.
Credit cards (and indeed the entire banking industry) work via cross-subsidies. Some of the people (a recent article quoting ‘industry lobbyists’ put it at roughly 40%) are the sort of credit user I am now, taking advantage of the benefits above without actually generating income for the issuing bank. The rest are the sort of user I used to be — carrying large balances at high interest rates, occasionally missing a payment and generating large fees and even higher interest rates. The income from that 60% has been enough to not just cover the other 40% but generate enormous profits for the banks as well.
Then along comes the worldwide credit crisis and — salt in the wound! — an act of Congress that finally puts limits on the bank’s ability to gouge their customers.
If you’re one of the 40% of responsible (aka ‘non-profitable’, from the bank’s perspective) credit users, be warned; they’re coming for you. They may have already begun. I’ll explain the first big change in part two.
(Photos by zingersb and jc.westbrook.)
