Using your credit card at certain stores can affect your credit rating. We find out how 'financial profiling' or 'behavioural scoring' works and whether it's legal.
Most consumers understand that their bank can reduce or withdraw their credit as a result of defaulting on repayments, declaring bankruptcy or losing their job.
But what about lowering your credit limit because of where you shop?
Financial profiling or 'behavioural scoring' is a new technique used by credit card institutions to identify customers who may pose a credit risk. It works by analysing spending habits - in particular, where the consumer shops.
For example, if you use your credit card to pay for marriage counselling or to retread your tyres, the bank may draw the conclusion that you are, or are about to be, in financial distress and consequently adjust or withdraw your credit limit.
Other behaviours which may be flagged by financial profiling include significantly reduced spending and shopping at budget store chains. Even actions as innocuous as shopping at the same stores as consumers with poor payment histories can make you seem like a credit risk.
While financial profiling is legal, it is beginning to attract the attention of financial regulators. In 2008, the U.S. Federal Trade Commission filed proceedings against Compucredit for neglecting to disclose the use of financial profiling to its customers.
American Express has also recently been in the U.S. media for reducing the credit limit of customers as a result of financial profiling. ABC News reported that Kevin Johnson, a public relations consultant in Atlanta with an excellent credit rating, had the limit on his American Express Blue reduced from $10,800 to $3,800 for spending at the same stores as customers who "have a poor repayment history with American Express"
Financial profiling has been criticised for unfairly affecting the credit ratings of customers who have done nothing wrong. By reducing a customer's credit limit, the bank indirectly impacts their credit rating by reducing the ratio of in-use to available credit.
There is also no opportunity for recourse. Individuals are not given justification for the reduction of their credit limit and often report difficulties in contacting the bank to negotiate a resolution.
If you believe you've been the victim of financial profiling, contact your financial institution and seek additional information on the justification for the credit limit decrease. If you're not satisfied with their response, you can refer the matter to the Financial Services Ombudsman.
