Credit Issuers Dig Deeper than Just Credit Reports
For some economists there’s a light at the end of the tunnel. Sure, the economy is bad right now, but things are looking up. For other economists, things have only begun to get bad and what’s coming will be far worse. I suppose it really depends on how you look at life – is the glass half empty, or half full? One thing that is certain is credit card companies aren’t taking any chances.
We’ve seen that it’s become clearly more difficult to get credit. In the wake of the housing market, credit card companies are not so eager to give credit to those who really can’t handle it. And as an additional precaution they’re tightening the purse strings on those who can. However, they’ve begun taking things just a little further.
Lenders have long relied on a consumer’s credit report to give them the information they need to extend the loan. Before it was simply a matter of what was on the credit report; on-time payments, credit ratio, etc., that was the basis of their decision. Obviously things like income, length of residency, and stability were taken into account, but there’s never been much of an emphasis on these factors before.
However, the credit card industry has decided they need to be more proactive in their research on consumers and their ability to repay. Instead of relying solely on what’s on the credit report, they’re now looking into the area in which people live and the industry that they work in. According to industry experts, the heightened focus is directed most at the states who were hit hardest by the housing slump; i.e. California, Florida, and Nevada. Consumer’s who work in struggling industries like finance and construction have also felt the tightening from their credit card companies.
In an effort to cut costs, credit card companies aren’t shy about the tactics that they’re using, either. Long-time customers who routinely pay their bills are finding their lines decreased drastically over a 5-point drop in their score, consumers with poor credit are finding it much harder to get credit, and lenders are demanding less advertising in “high-risk” areas. They’re making geographical assumptions about people’s creditworthiness and requiring higher standards of consumers in general.
Last time I checked, the Fair Lending Laws didn’t allow for geographical assumptions. These credit card companies are toeing the line of those laws very closely and I think it’s important this kind of behavior gets reigned in before it goes overboard. I read a story just today about a guy in Georgia who had three American Express cards that he used to run his business. The main one initially started with a credit line of $42,000. He was never late, frequently paid his bills off every month, and had racked up 780,000 rewards points – so you know he’s spending a boatload of money on the card. But, American Express cut his limit; first to $36,000 and finally to $4,300. That’s a huge decrease when we’re talking about a card for business expenses. Amex’s reason? He hadn’t reported anything to Dun & Bradstreet about his business so they were unable to tell if he was creditworthy.
There’s been speculation that the credit card industry is the next to have a sub-prime melt-down. However, they’re going to send the industry into a tailspin much like the stock market in the 90s if they keep going as they are now. Taking everyone’s credit away, increasing the FICO score required, and generally driving people away from credit cards isn’t in their best interest. While I don’t think a complete lack of credit use would happen overnight, I do think things can’t keep going in the same direction if they want to turn the industry around.
What are your thoughts on the credit industry’s about face? Do you think the industry can bounce back using these tactics, or do you think they could hurt the industry more?
Related posts:
- Consumer Reports’ Credit Cards Worth Holding
- Card Issuers May Know You Better Than You Think
- Free Credit Reports – Post-FTC Crackdown
- The Credit Cardholders Bill of Rights
- Five Ways to Make Your Credit Work for You
I don’t have a credit card and won’t get one so you know my bias. That said, if I’d thought the companies would pull those tactics when I did have credit cards I’d have gotten rid of them sooner and I probably wouldn’t have applied in the first place. Yeah, being too nosy and too draconian will hurt the credit card industry – they don’t make money unless people buy things with their cards. The less people can buy the less interest the credit card company can collect and the more likely that their already bad lending policies will come home to roost faster and harder than they might have otherwise.