Beware of Financial Profiling |
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by: Janna Weiss
Imagine having your credit limit lowered because you’ve been seeing a marriage counselor and charging the fees to your credit card. Imagine your loan application getting rejected because you work for a mortgage lender or a home construction company. Imagine, through no fault of your own, getting hit with a monthly spending limit on your credit card just because you shop at the same stores as people who have poor credit habits.
Welcome to the world of financial profiling.
John and Monica Bell from Chadds Ford, PA, use their American Express card regularly. They charge about $5,000 a month, but always pay the balance in full. You can imagine their surprise when they opened a letter from the card company that advised them of a new $1,100 monthly spending limit. The Bells didn’t do anything wrong. They simply fell victim to financial profiling.
The idea of profiling is nothing new; after all, lenders already look at our debt load and credit history before they decide to loan us money. Those figures paint a picture of our credit-worthiness and the risk involved if they let us borrow.
But the Bells and many others are being penalized for spending habits that they have not displayed. Instead, American Express looked at the places where the Bells do business and decided that, since other AmEx customers with similar buying patterns had defaulted on their payments, the Bells were at risk of doing so as well.
Specifically, John and Monica have a mortgage through Countrywide Financial Corp., a company, now owned by Bank of America, whose name is associated with the mortgage crisis. Because other AmEx customers borrowed irresponsibly and defaulted on their payments, it was assumed that the Bells might do the same.
American Express spokesman Michael O’Neill acknowledges that people’s spending habits are taken into consideration, especially when they appear to be similar to the habits of problem customers. While those similarities alone aren’t enough to justify a spending limit, says O’Neill, “If they're spending in a way that looks like a pattern of other people who had credit trouble before them, it gets added into the mix.”
Why are credit card companies holding their customers responsible for other people’s behavior? Because of the credit crisis. Banks and lenders are scared to loan money to anyone, including each other. With record amounts of defaulted loans on one side, and no access to borrowed funds on the other side, many banks have found themselves between a rock and a hard place – and their customers feel the pinch as they get declined for loans and watch their credit limits plummet.
In some cases, the profiling has gone too far. CompuCredit started slashing credit limits on customers who sought marriage or personal counseling, patronized bars and pool halls, or paid for tire retreads and automobile repairs. They also failed to disclose this new profiling system to their card holders, resulting in a law suit by the Federal Trade Commission (FTC).
In today’s credit climate, CompuCredit and American Express aren’t the only companies looking for reasons to lower people’s limits. Watch your own credit limits carefully, and call your card issuer to ask about any changes that you don’t understand. If they won’t reinstate your limit even though you’ve been a good customer, it might be time to take your business elsewhere.
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