For some, lowering based on where they shop
By CARRIE TEEGARDIN
The Atlanta Journal-Constitution
Sunday, December 21, 2008
From www.ajc.com
Kevin D. Johnson returned from a dreamy Jamaican honeymoon in October eager to check out wedding photos and help his new wife open stacks of beautifully wrapped wedding gifts.
Before getting distracted by the fun stuff, the 29-year-old entrepreneur opened the mail. Johnson’s mood soured when he got to a letter from American Express, saying it had slashed the credit limit on his account.
Kevin Johnson, 29, sits in his Peachtree Street office. After returning from his honeymoon, American Express informed him it was lowering his credit limit.Johnson was surprised, since he has a perfect payment history and a high credit score. And he was floored by one of the reasons American Express cited: It didn’t like where he shopped.
“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express,” the letter said. Johnson complained to American Express by phone and letter.
“That doesn’t have anything to do with whether I’m a paying customer or not,” he said in an interview.
Johnson checked his charges to try to figure out what might have raised a red flag in the American Express data-mining model. He didn’t see anything but typical transactions, including purchases at Amazon, Ruby Tuesday, Wal-Mart, Starbucks and Federal Express.
“I understand the need for and the power of predictive analytics,” Johnson said, “But I think they have crossed the line.”
American Express declined to discuss Johnson’s account. But it confirmed that it examines spending patterns. It’s just one of many tactics that credit card companies are using to try to keep default rates from growing higher. Along with studying shopping habits, American Express considers which mortgage lender a customer uses and whether the customer owns a home in an area where housing prices are declining.
These factors are combined with a review of other details to decide whether to adjust a credit limit.
“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.”
“It’s not a fair practice,” said Travis Plunkett, legislative director at Consumer Federation of America, a consumer advocacy group. “I imagine this person feels this is guilt by association. It doesn’t work in the justice system, and it shouldn’t work when it comes to credit card charges.”
Ed Mierzwinski, consumer program director at U.S. PIRG, a Washington-based consumer organization, said companies are telling consumers that “everything you have known for years is no longer true.”
The companies no longer guarantee customers will be considered low risk if they pay their bills on time and never exceed their credit limits.
“Now you have to watch where you shop, because if you shop where deadbeats shop or live where deadbeats live, we’re going to use that as a reason to lower your limits or increase your rates,” Mierzwinski said. He also questions whether the models are valid. “I just am not convinced that it’s a legitimate use of data mining,” he said.
American Express said it studies shopping patterns to set credit limits, not to set interest rates. But a dramatic reduction in a credit limit can have deeper repercussions. Credit scores are based in part on the portion of available credit a consumer uses. If a lowered credit limit means a customer’s account balance exceeds 50 percent of the limit, the customer’s credit score may decline.
It’s unclear how many banks that issue credit cards are studying shopping patterns and mortgages to rate customers. But all banks are working aggressively to stem losses.
“Credit card issuers are experiencing very high losses and are cutting back on credit availability,” Plunkett said. “They are searching for information and data that will allow them to make judgments about how they should restrict access to credit.”
The credit card delinquency rate hit 4.9 percent at the end of the third quarter — the highest since 2002, according to Federal Reserve Board statistics. Most credit card companies are lowering limits for many customers.
The industry said it may tighten available credit further due to new consumer protection rules adopted last week by the Federal Reserve Board.
The new protections include limiting the circumstances in which banks can increase interest rates on outstanding balances on credit card accounts — something the banks can do now even for a customer who has never missed a payment. One analyst has predicted that factors including the recession and new regulations will prompt companies to cut available credit by more than $2 trillion over the next 18 months.
American Express said a shopping profile would never be the only factor used in adjusting an account. Overall debt level is the primary factor, Gonzalez said.
When it cut Johnson’s credit limit, American Express said in its letter that his debt level, repayment history and length of credit history each played a role.
“None of the reasons given applied to me,” Johnson said. “They were all hogwash.”
He said he keeps charges below 30 percent of his limit and always pays on time. Plus, he has a high credit score.
Johnson is the chief executive of Johnson Media, a marketing and communications company he started while he was in college at Morehouse.
Johnson said the decision by American Express probably won’t have a significant impact on him. He’ll have other options since he has such a strong credit history.
But he’s not happy — especially about the company’s decision to use shopping patterns to assess risk. He said it sounds like “consumer profiling of the worst kind.”
Consumer advocates say fairness questions also arise when consumers with perfect payment histories are penalized.
“The argument can legitimately be made by any sensible person that this gets very close to redlining,” said Linda Sherry, a spokeswoman for Consumer Action, a national consumer education and advocacy organization.
Redlining was an issue in the 1960s, when consumers in certain neighborhoods — usually those with high minority concentrations — were not offered loans or insurance policies, or were charged more for the products.
American Express said it doesn’t discriminate and complies with all fair lending laws.
“We do not collect information about race, nor do we incorporate it into any of our risk models,” Gonzalez said. “It’s purely math.”
Johnson isn’t satisfied. He thinks Congress should examine the issue and that credit card holders should continue to question the practices, too.
“It’s our job as consumers to challenge them.”