Credit card limits being cut based on where you shop.
Credit card companies are now admitting to using profiling of your purchase patterns, and cutting credit limits accordingly. Even if you pay your statement on time, or even in full, your credit card limit will be cut if you shop at the wrong stores.
A “wrong store” is flagged if other customers that shop there pay their bills late. An American Express cardholder, with a 764 FICO score, had his line cut from $10,800 to $3,800:
“….one of the reasons American Express gave for lowering his credit limit: “Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”
For a frugal consumer, a credit limit should not be a big problem anyway, but if you use a card for points or monthly expenses, and then pay it off every month, it could be a consideration. Lower credit limits will also lower the borrowers FICO score. This can allow the lender to raise the interest rate, or trigger universal default.
Last year, the FTC sued some sub-prime card issuers for a similar scheme. These banks were flagging card use at pawn shops, marriage counselors, and strip clubs.
Today’s disclosure is significant, because it involves a mainstream issuer (Amex), not a sub-prime card company. Also, the merchants being flagged are not just “moral” hazards, but could be any popular store. Suppose you stop at a Wal-Mart for a bottle of aspirin while traveling, and the residents in that town are having financial problems. You could find your card being declined the next time you try and use it for an oil change on your Bentley.
Shopping at a consignment store can get your credit card limit cut.
A more serious concern is that card issuers could use this technique for questionable purposes. A bank could identify payments to health care providers, and cut/close a credit account based on the anticipation of financial problems due to medical bills. It is only one step away from flagging payments in ethnic neighborhoods, and going back to redlining in the 1970′s.
Responsible adjustments to a slowing economy can appear negative to a credit card issuer. Changing buying habits, such as switching from a designer clothes store to a discount chain, dining out less often, or even moving to a more affordable neighborhood can raise red flags to your bank. In a Denver Post article, Jeff Golden, a surveyor in Colorado dislikes the idea, and stated his opinion this way:
“My neighbor’s inability to pay his mortgage is not reflective of my ability to pay mine.”
This profiling practice, which was reported in the New York Times in 2008, can be an indirect way for banks to practice illegal redlining, and reverse redlining. By using purchase histories as an excuse, ethnic geographic areas can be excluded from lending. At the same time, borderline borrowers can be targeted by “reverse-redlining”. Borderline borrowers of all types can be made more profitable by cutting credit lines. A lower credit line puts the customer in a higher balance-to-limit ratio, which can trigger a higher rate directly, or through universal default.
We already know that banks mine data to target troubled borrowers, who pay higher rates. Cutting credit limits may benefit banks by creating its own troubled borrowers from their own customer base, who will then have to pay higher finance charges.
