How your buying habits could affect your credit

October 11th, 2009

Using credit cards seems simple enough – you apply for them and they come in the mail. Easy. Now your off to shop… But wait! There’s more to it than just pulling out that plastic and buying the things you need. As you delight in making those purchases, your credit card company could be making decisions about you based on what you buy and where you purchase it.

Are You a Credit Risk?

Let’s examine that question. American Express, amongst other credit card companies accumulate data on everything you buy using their credit card – from the coffee you purchased at Starbucks this morning to the used tires you purchased last week. Credit Card companies aren’t concerned with what you bought, primarily they want to know what type of establishment the purchase was made at.

This data is used to help Credit Agencies determine whether you are a risk to them. The purchases you made for those second-hand pants, Casino betting, and the bag of cleaning supplies you got at the Dollar Store are possibly an indication to your Credit Card company that you may be in some type of financial distress and as a result, you may miss a payment in the near future. This in turn could cause your credit limit to be lowered and in the worst case scenario, canceled.

Other Factors determining Credit Worthiness

Besides your spending habits, there are other factors Credit Card companies are suspected of using to determine whether you are worthy enough to obtain or keep their plastic. Where you live, your nationality and how much you make annually could also affect your credit. American Express has already acknowledged it used information about where customers shopped to lower credit limits. After much criticism and outrage earlier this year, AmEx announced it would no longer engage in the practice.

Representatives from the four top credit card issuers — Bank Of America, CitiBank, Chase and Wells Fargo declined to discuss details of how they use purchasing data internally. Many consider this highly proprietary information. However, a spokeswoman from a banking industry trade group acknowledged that the practice is indeed common.

Why Credit Card companies track purchases

There are important reasons why credit card companies accumulate data.

Marketing. Credit Card issuers use previous purchase data to predict what additional products and services you might be interested in buying. So for example, that if you charge a lot of travel expenses, they could offer you discount hotel and airline offers.

Risk management. Most large companies practice some type of risk management and your credit card company is no different. Card holders that make a practice of going over their credit limits or suddenly display shopping habits that are out of their norm (like taking out large cash advances) against their limit could indicate to the card issuer that the consumer may soon default in payment or be on the verge of bankruptcy.

Fraud detection. This is an important safeguard to prevent you from being a victim of credit card fraud. Credit card companies look at patterns in the way you shop and anything that deviates strongly from this will be flagged as suspect by the card issuer. In many cases these types of purchases will result in a phone call from the card issuer to verify charges.

Law enforcement. Law enforcement agencies use the information collected by the credit card companies as well as merchants to enable them in solving cases such as missing persons and credit card fraud. Some might argue this is an invasion of privacy, but we think it is one of the better uses of credit reporting.

A Looking Glass Into Your Spending Habits

Each and every transaction you make is processed by all the credit card networks and is assigned a merchant category code (MCC for short), this is a 4-digit number that tells what type of business is providing a service or selling merchandise. You can find a complete list of codes here. These codes allow credit card companies to see what your spending your hard earned credit on.

Where privacy is an issue

Most consumers aren’t aware of credit data collection – whether they are shopping online or locally, and it’s uses at the hands of their card issuers. Personal privacy and credit management are two important issues that should be in everyone’s mind.

Cash is always the best protector in keeping your credit clean and your transactions private. However, if you’re like me, paying with cash is not always the most practical or a readily available means of payment especially while buying online. In this case, I would recommend using a pre-paid credit/debit card or gift cards as an alternative to using a credit card as these types of purchases are not recorded by your credit card company. Online payment services such as Paypal, Amazon Web Pay and Google Checkout also offer online shoppers a means to pay for their items without repercussion from the credit networks.

Using one or more of these alternative payment methods is something to seriously consider, especially when that purchase is one that Visa, MasterCard or American Express deems a risky transaction.

Fighting Back

The most recent credit card reform law signed by President Obama includes a provision that requires federal regulators to investigate whether credit card companies use information about where consumers shop and what they purchase as a basis for limiting credit for individuals.

Something is being done to protect you and I, and to stop the wayward practices of the big credit card issuers from continuing their abuses of the past. In the meantime, all consumers need to become more aware and do all they can to protect their own credit

Have you experienced a reduction in your credit based on past purchases or your location? Leave us a comment.

Entry Filed under: Shopping