When the cashier at the checkout counter asks for your zip code, you might assume that there's no harm in answering her question -- it's just a zip code, after all. However, that cashier isn't just interested in sending you the store's catalog. Instead, she's building a profile of your spending habits for her employer, which can use the information to determine general demographic data about you like median income or the poverty level in your neighborhood.
The zip code, however, is just the starting point. From there, marketers can buy even more data about you from other sources to build a very detailed profile of your spending habits. That much more elaborate profile can be sold once again to other parties, including credit card issuers. In fact, if you have a credit card right now, your card issuer probably already knows whether you have a pet, watch porn or garden in your spare time.
Although they won't outright admit to the practice, credit card companies pay particularly keen attention to changes in a card holder's shopping patterns. If someone who normally shops at Williams-Sonoma starts frequenting a local dollar store, that might indicate a major life change (a job loss, divorce, etc.), which could lead to missed credit card payments. Armed with this unscientific risk assessment, the credit card company's next move could be to cap the credit limit on the account or possibly close it altogether.
Potential Divorce Equals Potential Defaults
Among the transactions that reek of impending financial doom are those that indicate that a marriage is on the rocks, according to an interview with Robert Manning, author of Credit Card Nation, in the Akron Beacon Journal. Paying for a marriage counseling session with plastic, for example, is a bright red flag for card issuers, he says. In the card issuer's eyes, the risk that the cardholder's overall income will be cut in half (or worse) is enough to go on the offensive, says Manning.
Another transaction that may give card issuers pause, are charged speeding tickets -- they may indicate an irrational or impulsive personality; someone who has to charge the ticket in order to pay for it, says Manning. Never mind that charging a ticket may actually just be a question of convenience -- paying online is much easier than writing a check and sending it off in the mail.
Banks swear up and down that they don't base the decision to hike interest rates or reduce credit limits on individual accounts based on consumers' buying habits. A spokesman for the American Bankers Association said there was only one card issuer -- it was American Express (AXP) -- that ever used these sorts of data-mining techniques and that it stopped after it received complaints about the practice. However, according to some industry experts, there's little chance that issuers can resist the data, especially given the current economic climate.
"The safest thing you can assume is that if it's not outlawed, they will do it," says Ben Woolsey, director of marketing and consumer research at CreditCards.com. "I think this became a more pronounced practice when the economy started suffering back in 2008 and there was extensive use of [data mining] based on the fear that the same people who lived in areas with extensive sub-prime mortgages or people who defaulted on their houses might also walk away from their credit card balance."
Illegal Profiling or Survival Tactic?
Woolsey says data mining is one of the few remaining tools card issuers have left to recoup losses associated with the CARD Act of 2009, a federal law that prohibits them from doing things like hiking rates without 45 days notice; retroactively changing the interest rates on existing balances; or changing the terms of the contract without proper notification. R.K. Hammer, a card advisory firm, expects the CARD Act to cost the banking industry $9.9 billion per year, or about $50 billion over the next five years. If card issuers can't generate interest revenue and fee revenue from previous practices, they have to look hard for new revenue sources.
"For banks, 70% of [credit card] revenue comes from interest income. If they cannot quickly [adjust rates] on a go-forward basis, they're losing that revenue source," says Dennis Moroney, research director of Bank Cards at the TowerGroup, a research firm. "I suspect you're going to see more fees now. It might be something like, 'You must keep a minimum balance of x or pay a fee of x,' or 'If you use customer service more than x number of times per month, you must pay x.' Banks are in the business of making money, but with all these new changes, they're trying to figure out how to recover lost revenue without losing their customers."
And they are going to use all of the tools at their disposal. Some risk management research firms, for example, are even collecting consumer data on social media sites such as Twitter and Yelp. One San Francisco-based data mining company called Rapleaf, for example, claims it can predict which individuals might be a credit risk by virtue of who they're friends with on Facebook. If a person's friends pay their bills on time, then that individual is also likely to pay on time.
Data mining puts banks in shady legal territory, though. The practice of using purchasing patterns to discriminate against borrowers of certain races or specific neighborhoods is illegal. And since the CARD Act was signed into law last year, the government has been preparing a report on how card issuers use purchasing data and whether data mining has unfairly affected consumers' credit scores, or minority or low-income card users. (The report is due out by May 22.)
In the meantime, it's probably advisable to pay for the bail bonds in cash.
Who Knows You Better: Your Credit Card Company or Your Spouse?