Lenders Watching Credit Cards And How Consumers Use Them

Companies issuing credit cards are taking on a new tactic to monitor their risk. Now they are watching, and compiling, what borrowers are spending their money on and where they are shopping.

How do they monitor credit card risk?

The purpose is to calculate who may be a credit risk and methodically weed them out of the mix. If consumers use their credit cards at secondhand clothing stores, or discount grocers, lenders are taking note. The assumption is that if a consumer uses certain stores, they could be in financial strains. Based on purchasing behaviors, creditors are making decisions about consumer’s creditworthiness and changing the terms of the credit agreement accordingly.

Congress is getting involved, however. Federal regulators are looking into the extent to which credit lenders are using shopping information against consumers. It’s become a standard practice that if a consumer poses a credit risk, lenders either increase their interest rate, slash their limits or both. Federal regulators are trying to create a watchdog service to protect consumers’ rights.

A new credit card reform law

President Obama signed a new credit card reform law into action this year. There is a provision requiring a federal investigation into the practices of credit card issuers using shopping information against card users. Namely, lenders seem to be using information about where consumers shop, what they purchase, the category of merchants they shop with, their locations and the mortgage company they work with as a basis for increasing rates or reducing limits. US Representative Maxine Waters said, “Where a person shops, in my opinion, has little bearing on whether they can pay back a credit card balance… I want this study done because I want to stop some of these outrageous practices in the future.”

Reporting on lenders

The Federal Reserve and Federal Trade Commission have until August 22 to gather information on credit lenders and assess whether or not they are unfairly watching consumer’s habits. Regulators have to decide if negative profiling affected minority and low-income credit card users. American Express is one issuer of credit cards that acknowledged its former usage of profiling information to limit the amount of credit it extended to customers, though they have since discontinued the practice.

Waters added, “I’m concerned that limiting credit based on where a person shops or neighborhood they live in could amount to red-lining.” Red-lining is the practice of targeting specific demographic areas or neighborhoods for the purpose of discriminatory housing, insurance or lending actions.

Address privacy issues

In addition to not being fair to consumers, there are privacy questions to address. “Obviously that is something that most credit card holders are not going to think about,” said Paul Stephens, director of policy and advocacy for the Privacy Rights Clearinghouse. “They’ve obtained a credit card and think they can go out and use it in any way they like.”

Suggestions from experts

Until rules are sorted out, many experts are encouraging cardholders to pay with cash, use gift cards or prepaid debit cards in lieu of their credit cards. Shopping at wholesale outlets or discount grocers may also thwart profiling. One expert suggests spreading purchases over a few credit cards to avoid triggering alerts for a single lending company. Stephens added, “Cash is the ultimate privacy protector. It’s kind of hard to trace. With most other payment mechanisms, there is going to be a trail.”

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