Credit Card Blog

If you thought credit scores were only used to help lenders decide whether or not they should extend credit – think again! Sure, you may know that there are employers who run a credit check before they hire; and that your car insurance premium is partly based on your credit score… but did you think your internet browsing would be affected by your FICO?

Google has started to experiment with their Google ads by showing more expensive products and services to individuals with higher FICO scores. Google has always been known for their pay per click advertising and the ability for advertisers to target specific markets – but is this taking it a step too far?

Right now, there is a database of about 2 million people through “Compete”, who agreed to share their credit score when applying for a new credit card. These people are then targeted with specific Google ads when they use their computer, based on what their credit scores are. This allows advertisers to reach consumers who qualify for their products – for example, advertisers trying to sell mortgages to people with FICO scores over 700 would only show their ads to this group of internet users. Primarily, this data will be used to target users seeking credit cards, but any company interested in displaying ads to a group of people with a specific credit score would be able to do so.

There has been much grumbling among credit card execs who oppose the pending changes in the way they do business. The new credit card laws will put severe limits on how much and how often interest rates can be raised. This is bad news for big corporations like CitiGroup and Bank of America, who generate much of their revenue from interest income.

On the other hand, smaller players like JP Morgan Chase, Discover, and American Express are in pretty good shape, even with the changes at hand. That’s because these companies didn’t expand their lending as quickly as their larger competitors. As a result, they haven’t suffered as much from the sub-prime credit crisis and the upcoming credit card reform.

JP Morgan Chase is the largest issuer of Visa credit cards. American Express and Discover have their own card networks, and don’t rely heavily on repricing and interest for their revenue. AMEX has reported losses, but the company has managed to stay profitable throughout the turmoil.

What will a restructuring of the big credit players mean for the average cardholder? Hopefully it will mean more competitive credit card terms, but it could also mean an end to “easy credit”.

For months, people have been complaining that their credit limits have been reduced, and wondering what the long term implications of that would be.  Turns out - just as predicted, the FICO scoring model is not quite holding up to the changes in the credit card industry.  As credit limits are reduced by banks (and not always at the fault of the cardholder), the debt utilization percentage increases for individuals and suddenly they wind up with lower credit scores.

 One woman in Oregon complained to JPMorgan Chase & Co when they reduced her credit limit that it would hurt her 760 credit score.  She claims the company said that wasn’t their problem - it was FICO’s problem to deal with.  When her credit limit was reduced from $42,500 to $12,000, her debt in relation to the amount of available funds she had quadrupled.  Since the debt utilization percentage is a large factor in how the FICO formula calculates someone’s credit score - she is concerned her lower score will cause problems if she should want credit in the future.

Approximately 30 million Americans have had credit limits reduced during the second half of 2008, according to estimates from FICO. 

The biggest problem with this situation is that when banks reduce a consumer’s credit line based on the overall economy, it is not an accurate indication of whether or not that person is a higher risk for creditors to lend to.  So when their FICO score is reduced, they’re labeled as higher risk for credit - increasing the interest rates they pay and making it harder to obtain credit.

 With President Obama’s new Credit Card Bill, there are questions whether it will force consumers to be more responsible with their finances or if it will throw the economy further into the downward spira. The new credit card laws will:

• place limits on marketing for prospective cardholders under the age of 21.

• make it more difficult for credit card companies to increase interest rates when cardholders are late making payments.

• Prevent cardholders from charging more than the credit limit, unless a cardholder agrees to pay over-the-limit fees in advance.

• Better disclosure of credit card interest rates and repayments, using a standardized text.

The new laws will take place in February of 2010 – and is not thought to eliminate the current credit freeze America has been experiencing.

The potential for new problems for consumers from credit card companies is increased. The average credit card rate is likely to increase over the next six to twelve months. There are likely to be new fees that cardholders have never paid before, as credit card companies look for ways to recover from the loss of revenues the new credit card laws will impose for them.

You’re at a bar. You want to have a few drinks. Before you begin, the bartender asks you for a credit card to secure your bar tab. What do you do?

First, realize that this is a common practice in most bars and clubs. If you don’t want to use your credit card, bring enough cash to cover your purchases. The credit card-secured tab is a safety measure for the bartender; if a customer leaves without paying their tab, the bartender is often required to cover the charges from their own pay.

What if you handed over your credit card, and now you’re seeing unauthorized charges on your account statement? Unfortunately, mistakes and fraud do happen sometimes. The best thing to do is check your account regularly. When you see questionable charges, give them a day or two to resolve. Sometimes they will come off. If the charges remain, get in touch with your credit card company and dispute the transactions.

For the most part, credit card bar tabs are good things. They’re convenient for the bartender, and they keep your card filed away from others so that you’re only charged for the drinks you actually order.

It wasn’t long after credit cards were first introduced in America that the companies realized it wasn’t the people who paid their balances in full each month that would make them the money – it was the people who carried a balance from month to month that would help them become the multi-billion dollar industry they are today.

The trouble with giving credit to the riskier customers of course, was that they had to figure out how to decide which cardholders would pay something each month, and not just run up a huge bill and skip out completely.

Two solutions were created – the first was to create a number of different credit cards, each with different credit limits, terms, and interest rates and give them out to people based on their credit score and credit worthiness. The second solution was a strategy to learn how different types of customers pay their bills. Companies started analyzing how people behave based on what kind of purchases they made on credit cards – and you might be surprised just how detailed their investigations and research have gone.

In 2002, an executive at Canadian Tire had breakthroughs in credit cardholder research when he analyzed the information from every customer who paid with credit card at Canadian Tire stores. The stores sold electronics, kitchen supplies, automotive goods and sporting equipment. Martin could see what cardholders were purchasing. He was able to pinpoint which brands people bought who would continue to pay their bills on time versus the brands people bought that would result in late payments or no payments at all.

People who used their credit card at a bar would typically miss credit card payments, while 47% of people who used their cards at a specific bar could be expected to miss 4 payments in a 12 month period!

Math geniuses who did nothing but study the trends and statistics of credit card use versus how the cardholder makes their payments were hired by all the major credit card companies to analyze risk for lending.

People having babies or getting married were shown to be more responsible with their credit cards and suddenly credit card companies were marketing to people getting married or having babies. Signs of depression or desperation (like seeing marriage counselors or going to pawnshops) would result in credit card companies reducing credit lines since they were more risky.

“If you show us what you buy, we can tell you who you are, maybe even better than you know yourself,” said Martin, who now works for Wal-Mart Canada. “But everyone was scared that people will resent companies for knowing too much.”

Data driven psychologists are not only employed by credit card companies to determine a cardholders level of risk, but also to handle their credit card collection calls. They know how to talk to people and what to say to get money out of them based on the things they’ve bought and the things they say during the phone calls.

Learn more about credit card company psychology: NY Times article

 American Express has announced a new service that helps families stay within their budget. Now, primary account holders can set spending limits on each additional card on their account. This is especially helpful for parents who give extra cards to their teens and college-age children. Instead of receiving an unpleasant surprise when the monthly bill comes, account holders can choose to be notified by text or e-mail when anyone on the account has reached their designated limit. Primary cardholders can even choose to raise or lower authorized users’ spending limits at any time.

American Express believes that this new service will enable families to take control of their finances and live within their means. Instead of doling out cash, parents can simply open a card in their child’s name and impose a reasonable spending limit. Both cards will earn reward points, and the child can begin to cultivate a good credit history at an early age.

To learn more about this new feature, contact American Express card member services.

It’s been a well known “secret” that credit card companies analyze cardholder spending and how they make their payments as a method of determining risk. They’ve learned that people who buy certain brands are more likely to pay their bills late or not at all; and what sorts of products paid for with credit will pretty much predict the cardholder will always pay their bills on time.

As an extension of this analysis, it’s possible that certain spending will start to affect your credit score. People who use their credit cards with the following industries may be among the first cardholders to experience credit score adjustments due to their spending habits:

• Gambling (casinos and racetracks)

• Pawnshops

• Liquor stores

• Marriage counseling

• Massages

• Spas

• Bail bonds

• Hospitals & Doctors offices

• Court fees

• Escort Services

• Thrift stores or secondhand stores

Based on research of cardholders making purchases with these industries and the probability of these cardholders paying their bills late or not at all – these are a few of the first industries that are considered suspect when a lender is deciding whether or not to extend you credit.

In 2010, the credit card legislation changes will provide regulations for just how far a credit card company can go to learn about you and your purchases. If you want to be sure your credit score isn’t being adjusted based on where you shop - be aware of where you are using your credit cards.

By now, you might have heard of the ‘Tennessee Credit Card Massacre’, one man’s attempt to destroy his credit cards in the most satisfying ways possible. In the video, Fred Wilharn of Franklin, TN, dons a familiar hockey mask and disposes of his credit cards by slicing, shredding, blending, drilling, and even electrocuting them.

What could drive a man to such vicious acts!? Wilharn had just paid off his credit card debt following a series of rate and fee increases. Rather than celebrating by simply cutting up the cards, Wilharn got creative and decided to commemorate the occasion with an entertaining horror movie spoof. The video has gone viral, and has been featured on ABC, Fox News, and in the Wall Street Journal.

Do you sympathize with WIlharn? Millions of cardholders have been stressed out by rising interest rates. Even folks with good credit standings have felt the pinch of lower credit limits and higher rates. If you’ve ever felt like cutting up your own cards, be sure to watch Wilharn’s YouTube video.

Fortunately, there are still some decent interest rates to be had. Take a look at our low interest credit cards to find one.