It sounds like a decree issued by the impetuous Queen of Heart in Alice in Wonderland: Charge groceries to your credit card, and I shall slash your credit line! Unfortunately, this is not Alice in Wonderland, and it’s not simply the whim of a hotheaded fantasy character. It’s real life in credit card land at the dawn of the 21st century.
One of the fallouts from the credit crisis is card issuers are taking aggressive steps to protect their sagging bottom lines. In the heyday of the credit boom, credit card companies handed out credit cards like candy, poor credit score or no credit history notwithstanding. Now that the table has turned, credit card companies are getting cold feet, and to limit their risk, they are trying to cut back their exposure to more risky cardholders.
Their answer? Financial profiling. According to Good Morning America, in a strange new twist in credit land, managing your credit wisely is no longer enough. You also have to make sure you don’t live in the wrong neighborhood or shop in the wrong type of shop.
Some credit card companies are hiring data consultants to mine the records of cardholders in order to identify cardholders who are considered a greater credit risk. People who live in low income neighborhoods or in areas, where foreclosures are high are considered higher risk and more likely to fall behind on their card payments. So are cardholders who shop in deep discount stores, who frequently charge essentials like groceries to their cards, or who shop in stores where a lot of people with poor credit habits also shop.
People who get targeted because they fit the card issuer’s profile of high-risk card holders might find their credit limit lowered or interest rate increased. It’s the card issuer’s way of saying, sorry, but we don’t really want your business anymore.
Financial profiling is nothing new, card issuers and banks have always taken a close look at your credit worthiness before deciding to issue you a credit card or give you a mortgage. What’s unusual is that card issuers now are using the buying patterns of other card users to determine whether you are a credit risk.
Card companies use behavioral scoring to determine the degree of risk, so just having some similarities with high risk users (such as living in a high foreclosure neighborhood) is usually not enough to justify a credit limit cut. However, the more a card holder fits the profile of a high risk user, the greater the chance of being singled out.
Here are some of the items that card companies may look for:
Your purchase pattern. One component of behavioral scoring studies your purchase patterns to look for signs of financial distress or excessive spending patterns. Frequently charging groceries and other essentials to your credit card or always shopping at deep discount stores could be taken as a sign of distress.
Where you shop. If customers shopping in the stores you frequently shop have poor repayment histories, you may be put in a high-risk category.
If you do find your credit limit lowered or notice other changes to your account, call your card issuer immediately and complain. The decision to cut your credit limit or change your terms is generally computer-generated. If you can argue that you were profiled in error and give evidence that, indeed, you’re not a high-risk user, the card issuer may reinstate your previous terms. If they’re not willing to work with you, it might be time to take your business elsewhere.
