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Big Brother Is Watching Your Money

Barbara Bensoussan

Once again you’ve come home to a mailbox stuffed with credit card offers promising the moon, and more. How did they find you? And what do they know about your credit rating that you don’t know? As it turns out, they know plenty. Here’s how you can become savvy about your credit rating too.

Wednesday, August 22, 2012

big brotherNot-So-Private Eyes

In his influential 2009 New York Times article “What Does Your Credit Card Company Know About You?” author Charles Duhigg wrote that the first major “breakthrough” into penetrating the psyches of consumers occurred in 2002, when “J.P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit card transactions the previous year. Canadian Tire’s stores sold electronics, sporting equipment, kitchen supplies, and automotive goods and issued a credit card that could be used almost anywhere.”

Martin’s analyses of the data produced observations that ranged from the commonsensical to the quirky: people who bought off-brand motor oil were more likely to miss a credit card payment than people who bought the name-brand oil. “People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments,” Duhigg wrote. “Anyone who purchased a chrome-skull car accessory or a ‘Mega Thruster Exhaust System’ was pretty likely to miss paying his bill eventually.” Martin was even able to identify the riskiest bar inCanada, Sharx Pool Bar inMontreal, where 47% of the patrons missed four credit card payments within a year.

The psychological profiles Martin was able to construct from his data of spending patterns proved a much better predictor of cardholder behavior than former indices like income and credit history. Unsurprisingly, other people in the industry lost no time jumping into the game, in the hopes of finding new customers and keeping watch on the current ones. (Martin himself now works forWal-MartCanada). The results led to tactics like sending credit card offers to people who had registered for baby showers or weddings, since getting married and having a baby are both good predictors not only of spending a lot of money but of settling down and becoming more responsible.

Data profiling has continued to expand exponentially, allowing the banks to evaluate the risk-worthiness of their customers. Robert Manning, author of Credit Card Nation, warns that certain purchasing behaviors raise red flags to credit card companies — including some behaviors you might otherwise find commendable. Paying for marriage counseling with a credit card, for example, which might normally be seen as a positive move towards reconciling a couple, looks more like a sign of instability to data profilers. If a couple divorces, their incomes split as well — which doesn’t bode well for paying off balances. The result could be that the next time the couple in therapy asks to raise their credit limit, they might get “no” for an answer.

You don’t want to pay for a speeding ticket with plastic either, Manning says. Simply getting the ticket signifies reckless behavior, and charging it on a card not only makes it traceable but indicates a possible inability to pay up front. You will also raise profilers’ eyebrows by buying from infomercials at 3:00 a.m. Like your mother, banks will want to know what you are doing up at that hour: Losing sleep over a lost job? Worrying about a failing marriage? (Not to mention the real possibility that a person capable of falling prey to the “it-slices-it-dices” lures of an infomercial may lack fiscal judgment in other ways.)

The truth is that any sudden change in spending habits, whether it’s splurging or cutting back, will cause a credit company to sit up and take notice. A person who usually buys in Bloomingdale’s and suddenly begins buying in 99-cent stores is quite likely a person in financial distress — especially if this becomes a regular occurrence and it’s not just a couple of trips to buy party favors for a kiddie birthday party. It’s a particularly bad sign when people suddenly put groceries on credit cards without paying off the balances every month, and even worse when mortgage payments are charged onto a card.

Data profilers aren’t just looking at our spending, by the way; they want the whole picture. So lately they’ve been looking at who we socialize with. According to Betsy Schiffman of www.dailyfinance.com, “Some risk management research firms are 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 whom 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.” 

 

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