Outrageous Credit Card Practices
Last week, I wrote about The New Rules that the government is going to be implimenting for the credit card companies. These are a largely positive development that will curb some long standing onerous practices such as double-cycle billing, payment due dates that fall on weekends and holidays, and over the limit fees.
They Are Just Getting Started
Unfortunately, I fear that the credit card companies are just getting started when it comes to unsavory practices. Today, we read at the Atlanta Journal and Constitution (via the Consumerist) that card companies are sinking to a new low. An American Express card holder is having his credit reduced based on where he shops. The card holder says he pays his bills on time, and uses less than 30% of his available credit. Amazingly, Amex doesn’t even deny this practice:
American Express said it studies shopping patterns to set credit limits, not to set interest rates.
“We’re just doing this to manage risk,” said Lisa A. Gonzalez, an American Express spokeswoman. She declined to say which retailers or mortgage companies are associated with consumers with higher default rates. She said it makes sense to examine these factors because “customers who have loans outstanding with certain lenders or customers who make transactions with certain merchants tend to have a higher proportion of credit issues or a higher probability of default.”
The cardholder, Kevin D. Johnson, of Atlanta, happens to be black. When consumer advocates heard of this, they felt it seems suspiciously like redlining, the process of deny credit based on race.
What’s Next, Precrime?
Remember the good old days when the credit companies looked at your credit history? Now, apparently they are looking at your credit future. Maybe the police will get in on the act, a la, The Minority Report. In that science fiction movie, people were arrested based on crimes they were likely to commit, but hadn’t committed yet. The agency responsible for the arrests was called the Office of Precrime. By the end of the movie, it was shown to be a sham.
What Other Shams Do The Credit Card Companies Use?
The whole idea of credit scores has some serious flaws in it. For one, your credit score is based, in part on the number of credit inquiries you have had recently. Getting a quote on a car loan, applying for a school loan, and opening a bank account all generate inquiries. There is even a financial version of the Heisenberg Uncertainty Principal at stake. Heisenberg’s law holds that merely observing the state of a subatomic particle changes it, thus it can never be accurately observed. In the same sense, merely getting your own credit report is considered a credit inquiry and may, in part, lower you credit score.
What’s Wrong With This Picture?
Let’s say I am offered a new job on the other side of the country. The company runs my credit as part of their new hire background check. Then, I rent an appartment in my new city, lease a car there, open a checking account at a local bank, and purchase insurance from a local broker. Soon, I want to purchase a house, but when I apply for a loan, I am told my credit score is too low. This is because I have had too many inquiries on my credit report! Amazingly, the fact that I have paid all of my debts on time, and got a new, higher paying job is not all that important. The credit agencies, using a secret formula, have decided that I am now a bad credit risk because I have had too many inquiries. I can argue with them all day, however, all they care about is the score.
Where This Is Going?
This could go in a couple of different directions. In one scenario, the companies continue this practice, accepting all of the false positives that their systems and the credit scoring systems produce in their effort to predict who will default in the future. Unlike the movie, no one goes to jail for crimes they will commit in the future, and the banks feel that the false positives are an acceptable loss.
In the other scenario, the credit markets return to some sense of normalcy, and banks actually want to do business with consumers who pay their bills on time. They may drop their weird models that predict your future payment by the stores you shop at, and get the credit scoring agencies to put a little more weight on your actual payment history.
The one thing that I wouldn’t expect is for the government to step in to resolve this. Banks have been using unfair and deceptive practices for decades, and only now have the first steps been taken to reign them in, albeit eighteen months from now.
Until then, the banks are declaring war, often some of their best customers. Care to guess how that will turn out?