May 31, 2010
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Profiling By Credit Card Companies, Pt.4
What do you spend your cash advance on?The Federal report revealed another monitoring practice used by credit card companies to determine risk; cash advance. One such practice involves monitoring cash advances of new credit cardholders in relation to large purchases at jewelry and electronic stores such as Best Buy. Lenders say that research indicates that such early spending behaviors are early signs of delinquencies and defaults. Furthermore, credit card and identity thieves will often open new accounts up in the victim's name and then max out the card. Card companies say that transaction specific information is a valuable entity in fraud detection.
Consumer advocates say that most concerning to credit cardholders is the amount of personal information lenders collect and store on personal spending habits. However, the Fed report said that lenders who use transaction related information to make changes in the card's terms typically collect broad categories; for example, the total amount dollar amount of the credit card transaction rather than the amount spent on one particular item. Furthermore, lenders say they use broad based categories such as hardware and entertainment stores rather than the actual name of any particular retailer. One lender acknowledged that it had used the fact that consumers used their co-branded card more frequently at other merchants rather than the affiliated retailer to justify reducing the cardholder's limit.
According to the Fed report, the number of respondents that acknowledged participating in questionable profiling practices affected a relatively small group of credit card customers. Supporting their point of view was the fact that from over 53 active card accounts between two lenders that participated in these practices, 340,000 reduced credit limits, however, only 1,900 were initiated by questionable profiling practices. The question is, how many is too many? And, what is the impact on discrimination? The Fed concluded its report by advising Congress to proceed with caution in banning certain profiling activities based on cardholder spending habits because of implications on card and identity fraud.