Beware of Financial Profiling

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.