What you buy and where you shop may affect your credit scores.
As credit card companies continue to tighten their lending standards on card users, some are using purchasing data -- gleaned from millions of card transactions processed daily -- to weed out who may or may not be good credit risks.
Have you used your credit card at merchants specializing in secondhand clothing, retread tires, bail bond services, massages, casino gambling or betting? Your credit card issuer may be taking note -- and making decisions about your creditworthiness based on your purchasing behavior. Buying used clothing or retread tires, for example, may be an indication of financial distress and a preamble to missed credit card payments or defaults.
Now, Congress and federal regulators will probe the extent to which credit card issuers have used information about where a person shops or what they buy as reasons to lower credit limits or increase interest rates. When credit limits are lowered, it can adversely affect utilization ratios, which measure how much of cardholders' credit limits are used. Lowering credit limits increases the utilization ratio and can lead to lower credit scores.
New credit card law: Study this practiceThe new credit card reform law signed by President Barack Obama in May includes a provision requiring federal regulators to investigate whether credit card issuers used information about where consumers shopped, what they purchased, the types of merchants they shopped with and their locations, and the mortgage company they borrowed from as bases for increasing interest rates or reducing credit limits.
"Where a person shops, in my opinion, has little bearing on whether they can pay back a credit card balance," U.S. Rep. Maxine Waters, D-Calif., said during an April 22 hearing on credit card reform conducted by the U.S. House Financial Services Committee. "I want this study done because I want to stop some of these outrageous practices in the future."
The Federal Reserve, the Federal Trade Commission and other banking regulators must report to the U.S. House and Senate financial-services and banking committees, respectively, detailing whether card issuers engaged in the practice between May 22, 2006, and May 22, 2009.
Regulators must also determine whether the profiling negatively affected minority and low-income card users. The Fed must make recommendations for any changes to existing rules or laws that may be necessary to curb harmful practices. Results of the study are due by next May 22.
Waters noted that American Express has already acknowledged it used information about where customers shopped to lower credit limits. After a firestorm of criticism and outrage earlier this year, AmEx announced it would no longer engage in the practice.
Is it redlining?"I'm concerned that limiting credit based on where a person shops or the neighborhood they live in could amount to redlining," Waters said, referring to the practice of targeting certain areas or neighborhoods for discriminatory housing, insurance or lending treatment.
With credit card transactions, every time you make a purchase, a record of that sale is logged into a database of information collected by your credit card issuer. Privacy experts warn that consumers should be mindful of what they buy with plastic and what purchasing data credit card issuers may be analyzing.
Privacy questions"Obviously that is something that most credit card holders are not going to think about," says Paul Stephens, the director of policy and advocacy for the Privacy Rights Clearinghouse, a San Diego privacy rights group. "They've obtained a credit card and think they can go out and use it in any way they like."
Experts say cardholders concerned about keeping purchasing habits private or avoiding credit score dings should consider using cash, gift cards or prepaid debit cards. Shopping at large supermarkets or wholesale clubs, which offer a variety of product lines, may also keep some purchases private. Other tips: Spread purchases that may indicate risky behavior over several credit cards to avoid triggering an alert for a single issuer.
"Cash is the ultimate privacy protector," Stephens says. "It's kind of hard to trace. With most other payment mechanisms, there is going to be a trail."
But avoiding credit cards for the sake of privacy may present a quandary for some users: If they had the cash to pay for items, they wouldn't need credit cards. For others, the convenience of using credit cards over other payment methods outweighs the potential privacy concerns.