This week's Dollar Stretcher newsletter sent me a link to a site that I found, well, puzzling. It's an article from creditcards.com that claims credit card issuers are actually tracking your purchases and analyzing them for signs of financial stress. If they catch you spending on items they consider high-risk, such as gambling or marriage counseling, they may respond by slashing your credit limit or increasing your interest rate. The page features an interactive graphic showing how various purchases allegedly help or harm your creditworthiness.
Some of the items in the graphic made sense, sort of. Alcoholic beverages, for instance. I can see how running up a big bar tab might be a sign of irresponsibility (although it could just mean that you bought a round or two for a large group of friends). And I guess I can see how frequenting pawnshops could be a sign of financial stress, although it seems to me that selling would be a much bigger red flag than buying. But some of the others were just baffling to me. For example, the article claims that buying a premium brand of birdseed is a sign that cardholders will "focus the same sense of responsibility to their credit score as they do to the birds in their yard," while buying a generic brand of bathroom cleaner is a warning sign because "Cardholders who purchase generic items instead of pricier, name-brand products exhibit greater risk of missing payments." Huh? You mean someone who chooses generic products, which are often identical to or even superior to name brands, is more likely to miss a payment than someone who wastes money on the costly name brands? And someone who buys expensive "premium" products, whether or not they are actually better, is being financially responsible?
In some cases, I can't figure out how the credit card issuer is even supposed to know that you bought these items. Sure, if you go for a massage, the charge on your card will read "True-Line Massage" or whatever (though it does seem a bit absurd to consider a licensed massage therapist the same thing as a seedy "massage parlor" that might be just a cover for less legal forms of physical contact). But how is your card issuer supposed to know whether the $20 you spent at Target was for premium birdseed (supposedly good), a generic cleaner (supposedly bad), or felt pads for your chair legs (supposedly good, because it means you're "extra-protective of [your] belongings")? The whole thing strikes me as bogus, especially since the article didn't actually quote anyone in the credit card industry about these alleged purchase-tracking procedures or provide any other evidence that they actually exist. In fact, there's no way to be sure that the folks at creditcards.com didn't just make the whole thing up, though it's hard to see what their motive would be for doing that (unless they think they'll get more business if they keep us cardholders nervous and paranoid). But if the banks really are using formulas that penalize frugal shoppers for buying from "merchants specializing in secondhand and generic items," then all I can say is, they're being idiots.
Of course, given the banking industry's track record in recent years, perhaps I shouldn't be surprised.
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If (and I do say “if”) credit card companies track your purchases to affect your credit rates, it is a fairly good bet they are using statistical techniques to make the decisions. “In the past, people who purchase from Target are 3 percent more likely to default than people who purchase from K-Mart.” – that sort of thing. That is how the insurance industry generally does it – much to everyone’s annoyance because it means they cannot give straight answers to simple questions like “Why did you disqualify me just because I have lived in the same residence for 3 years?” (This last example actually happened to me.)
If they are doing it statistically, then their decisions become matters of interest and curiosity, rather than statements of the absurd. Instead of asking what kind of idiot would disqualify me for choosing Target over K-Mart, the question becomes “Why are Target shoppers historically more likely to default than K-Mart shoppers?”
Of course, this kind of co-relational evidence only makes the practice seem all the more insidious. In fact, I have a weak memory that possibly there are now laws controlling the insurance industry’s use of these methods.
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