Credit Cards Turn To Behavioral Analysis To Manage Risk

Credit card companies are looking for new ways to manage consumers’ risk of defaulting on balances.  Apparently, they now plan to review cardholders’ spending patterns, including which merchants they frequent, to determine build their risk model.

Credit card issuers are no strangers to using behavioral analysis to shape much of their business.  Trust me; I used to work for one.  I remember attending a number of meetings with marketing people arguing across the table from risk people about raising late fees from $25 to $29.

Marketing would point out that people may be less likely to sign up for the card, or cancel the card, if fees were increased.  Risk pointed out that the fees may deter people already on the edge from falling behind (assuming if the fee was higher for their card they would keep it current, and let the card charging a lesser late fee go past due.

The compromise reached involved risk-based pricing, a way of separating cardholders into various “buckets,” and each group being be charged different sets of punitive fees, interest rates, etc. But now it seems credit card companies are taking this idea a step further.

Attention Wal-mart Shoppers, Hide Your Credit Cards

Just the other day, Writer’s Coin passed along a story originally appearing on Good Morning America.  From the Writer’s Coin, a brief description of the video:

It featured Kevin Johnson, a responsible credit-card user that had recently seen the limit on his American Express Blue card go down by $7,000. What could possibly cause AmEx to lower his limit when he pays his card in full every month, has a 764 FICO score, and owns his own business?

When Johnson questions American Express to find out why his credit limit was decreased, he received the following response:

The answer: Kevin Johnson had recently visited a Wal-Mart that he doesn’t typically go to, and the reason AmEx gave him was:

“Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express.”

Yikes!  So American Express is now determining credit worthiness based on where you shop?  If people use an American Express card at a Wal-mart where someone else used the same card and subsequently went bankrupt, does that mean Kevin Johnson will go bankrupt?

I don’t like the idea of being lumped in with others, but this bothers me on another level.  I wonder if Amex would do the same thing to a cardholder shopping at a swimming pool supply store?  One could assume that shoppers there are homeowners, and relatively affluent because the have a swimming pool.  Of course, that doesn’t tell the whole story.  They could be two months behind on their mortgage and buying pool supplies to get the water blue in time to show the house for a motivated sale!

The pool supply store example is just as flawed as the Wal-mart example.  Wealthy people may choose to shop at Wal-mart to save money, or search thrift shops because they are frugal.  It is not an indication of financial troubles. The end result of all this analysis by credit card issuers is that they will ultimately lose loyal customers.  The problem is there are hundreds of people ready and willing to take their place.


  1. This is just ridiculous – especially with today’s economic situation. It makes me wonder what stores now classify as “good” stores to shop at in the eyes of Amex?

    On the other hand – how high was this guy’s credit limit if it was cut by $7000??

  2. Can’t say I blame Amex though. They’re doing what they think is best for their company – trying to minimize defaults. The beauty of capitalism though is that, if you don’t like it, use a different card! Wonder how long it will be before the gov. steps in and says this is illegal.

  3. @BayouJosh: I had the same thought. I’m sure it will be deemed “unfair” by some government entity, who will then force banks to lend money to those who may not otherwise deserve it. Sound familiar?

  4. Great article. Credit card companies, like any other lender, need to use all their resources to lend to good risk borrowers.

    Personally, I think their conclusions about Wal-Mart shoppers are flawed and, given time, will come back to bite them on their backside. Free market forces will prevail!

    On a positive note, I find it encouraging that Amex is being judicious about their lending. Hopefully the days are gone when CC companies offer credit to dogs, kids and dead people.

  5. This story broke all over the place after some reports surfaced on The Consumerist. The NY Times picked it up and hit AMEX direct. They had a letter sent to a guy saying this was policy. When he (NYT) asked them about it they denied this was a policy any more and acted confused. Of course, they had to, to name a store that took their card and say “we don’t like ‘this’ store’s patrons would be to, as they say sh*t where they eat.” It’s plain stupid and in truth, as he points out in the article, shoppers spending more wisely – or frugally – at a store the Wal-Mart or a dollar store are perhaps *better* customers for AMEX. Regardless, now that the light has been shown on them AMEX has to stop, else they risk eroding their merchant base AND they cardholder base – stupid considering their financial situation.

    They did indicate they use many ‘data points’ to determine these things, but such direct changes as you detail here *they say* in the NY Times article are now a thing of the past. All this suggests to me fear of what the bill on the Hill might bring to the card companies. They are rushing in and doing things like this before their hands are tied; they want to reduce ‘exposure’ before this whole Capitalism experiment goes down the crapper.

  6. Solution – Don’t use credit cards. Why even give the crooks a chance of having any of your hard-earned money. I have lived quite well for 2 years now with no credit cards – none! I have a debit card if I need to use it but generally pay CASH. I am sure we are spending less now because we are investing more than we ever have been able to in the past and our savings account looks better than it ever has.

  7. I shop at Walmart to save money so that I can pay off the credit card every month. I’m wondering how long before they take away the Point Program. Credit card companies are starting to make pay day lenders look respectable. Crazy!

  8. All automated machine learning is trying to do is minimize prediction error, assuming it costs us $X for each customer we screw over and saves us $Y for every one with poor repayment prospects. The learning will try to maximize Y-X, by tweaking the information you give it.

    They made a mistake with this guy, but on average their actions save money (if they’re doing the math right which I seriously doubt, see below) on average, which is what their racket is all about.

    I’d also argue that this particular example is egregious (mathematically and morally), as the amount of information in one WalMart purchase is so small compared to FICO score, repayment history, and the like. Reducing a score by that huge amount so abruptly is a drastic correction based on little, an outlier.

    Of course you probably know all this given you used to work for such a company:-)

  9. So if I start spending lots of money at luxury stores, will my credit limit go up? How does that make sense during this recession?

  10. Have to agree with Alex on the amount of information compared to the decision. The fact that a person shops at such a predominant store as Wal*Mart, and that other people that shop there may have poor repayment histories, isn’t enough to determine that he is a risk. It’s an affirmation bias. They need to validate it further with either more information on the purchase (types of products might indicate a higher economic standing) or look at other historical factors for the person.

    AmEx is foolish. If this is their risk mitigation approach, they’ll lose far more opportunity than they reduce risk.

  11. Amex did this to us too, for a different reason. Our credit limit was lowered and we were told it was due to us having a Mortgage through Countrywide. Even though we have payed our mortgage on time every month and have not defaulted on Amex either, they considered us high risk since a large portion of Countrywide customers have defaulted. I was so angry I paid off Amex and don’t use that card anymore.

  12. @DDFD – How does this warrant any type of legal action against AMEX? It’s their lines of credit. They should have the right to lend it (or take it away) from whomever they want. I agree that this isn’t a good idea from a business standpoint. They’re not only alienating customers, but retailers also.

    And Cristi P. has the perfect solution – if you don’t like it, don’t use their card. Like @Boomer says, “Free market forces will prevail!”. If enough people rise up against this, then they’ll have to stop. If enough people don’t care, then it will continue.

    Either way, stepping in with lawsuits or legislation here is totally inappropriate and unnecessary.

  13. @DDFD – We agree that credit should be given out based on one thing – you’re ability to pay it back. Creditworthiness is based on many factors – amount spent, frequency of spending, proximity to your credit limit, whether or not your bill is payed on time…But, should “location of spending” also be included in this equation?

    My point is simply that the credit cards should have the right to add this factor into the equation if they want. I don’t think they should, but they should have the right to.

  14. @DDFD – They definitely prey on unsuspecting consumers, that’s for sure! No doubt that many people get behind on cc’s with the “help” of the cc company (higher limits, enticing offers).

    On the other hand, I’m a firm believer that “you reap what you sow”. Everyone knows that cc’s are out to make money. In many ways, if you have cc problems, you have no one to blame but yourself.

    So…while “protection for the little guy” is sometimes necessary, I don’t want that protection standing in the way of a free market.

  15. We had a Barnes and Noble Mastercard from Barclays and encountered a similar problem. They began using fraud detector software that would shut the card down when you went to make a purchase. We got tired of being embarrassed when the companies we shopped would decline our card. When we called Barclays, they said our card was put on hold to protect us because the software thought someone stole our card. After many calls, we gave up and cancelled the card.

    I know CC companies need to protect themselves. We live in a time where people have unrealistic, untamable lust for “stuff.” Everyone wants to live outside their means. Maybe those of us who pay off our CC each month are only encouraging the CC companies to seek out more clients (or victims). I know even though we pay ours off each month, I still feel the desire to spend more than necessary.

    I suppose if your insurance company can check your credit rating to give you car insurance, then the CC company can fault you for shopping at certain places. It certainly does “reek of Bibg Brother.”

    We have USAA for our bank, and they actually call us when there is a charge they think is fraudulent, rather than shutting off the card like Barclays. Our bank especially likes to call us if we go to Radio Shack!