Banks Lowering Credit Limits Based on Consumer Behaviors
Consumers may want to think twice about where they shop and the type of purchases they make to avoid getting hit with a lower credit limit, reports ABC’s Good Morning America (“‘GMA’ Gets Answers: Some Credit Card Companies Financially Profiling Customers,” Jan. 28, 2009).
With increasing frequency some credit card companies are relying on “behavioral analysis” to not only detect suspicious purchases and protect customers from fraud, but also to determine if a customer’s behavioral patterns indicate that the customer poses a credit risk to the bank itself.
Cardholders who are deemed a risk are getting their credit limits reduced, which could negatively affect their credit score since a reduction in available credit will often affect the ratio of a cardholder’s available credit to credit that is in-use.
Even cardholders who are in good standing with their creditors, but who shop at stores where customers generally have a poor record of repaying their debts could see their credit limits lowered. Kevin Johnson, an American Express customer who has a credit score of 764 out of a possible 850 – considered an “excellent” score by most experts – saw his American Express credit card limit slashed from $10,800 to $3,800 despite his solid credit history with the company.
In a letter sent to Johnson, American Express said among its reasons for reducing his credit limit was the risk posed by other borrowers who had similar shopping histories, a practice called “behavioral scoring.”
“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express,” the company explained.
Banks Use Data-Mining to Sniff Out Risky Borrowers
Banks may soon use customer data to “weed out” cardholders who are living in zip codes hardest hit by the recession and whose purchasing behavior suggests they are risky borrowers, which Robert Manning, director of the Center for Consumer Financial Services, says is a credit reporting procedure that has been made easier and faster since 9/11.
“Many people don’t understand how almost every transaction they make today could trigger a readjustment in bank analytics,” he said.
Manning, also author of the book “Credit Card Nation,” says more financial institutions may be using behavioral analysis to cut off risky customers before the banks take a loss.
“They’ve crossed the ethical line,” Manning said, “in terms of looking at where you’re spending your money and making a judgment about whether that’s a good or bad decision for you to make given these financial times.”
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