In January, the New York Times had a story on some of the data-mining that credit card companies are doing to “manage risk.” American Express was accused of, admitted to, then later denied using people that shop at particular merchants as the basis to cut someone’s credit down to size. Citibank is looking at mortgage data. CompuCredit got in trouble for slashing the credit of anyone that had the nerve to see a marriage counselor recently got a flat tire repaired. That latter part I guess is because if you’re too cheap to get the tire replaced, you must be hard up and a bad credit risk. I guess I’m lucky that last time I had a tire problem, it was beyond repair. Or I’m lucky not to be a CompuCredit customer.

I have no doubt that when it comes to a lot of these things do make you statistically more likely to be a problem in the aggregate. Marriage counseling, after all, is a step on the road to divorce sometimes. A part of me is sympathetic to the idea that lenders should be able to use whatever criteria they want because they should be free to lend however much they want to whomever they want. Free country and all that.

But that doesn’t do a thing to get me any less pissed off at this sort of thing.

It’s one thing to discriminate against people that have done something to suggest that they personally are a risk. Even there I have some problem with it insofar as it can misrepresent the service that they provide. When my ex-roommate Hubert got into a jam because his wife unwisely needed medical attention at a time when money was tight, despite their good record with their credit card companies they saw their interest rates skyrocket and credit lines dissipate because they were suddenly racking up a lot of expenses and weren’t able to pay everything off right away. Suggesting that you offer a certain amount of credit at a certain rate provided that you never actually need it and then pulling the rug out from under when they do is dishonest.

But some of the above is even worse because it largely involves things that you have absolutely no power over. Theoretically, Hubert and his wife could have had more money saved up, could have borrowed from friends and family, or something like that. But to have a house in a neighborhood where your neighbors are falling on tough times? Do we need to start asking for the credit ratings of our neighbors before we buy a house? Or cases where somebody is doing the prudent thing. Penalizing people for shopping at places where you can get things cheap? Should I really need to be concerned that the money I save by getting a tire repaired rather than replaced could come at the cost of my credit? Then the other thing is that we don’t even know what they’re looking. We have no way of knowing what we’re doing wrong. We don’t even know that we need to choose between going to a thrift store and keeping our credit lines. We’re expected to play by certain rules without being told what these rules are.

Worse yet, these things don’t just affect how much credit you have at any given time. They are materially important. From what I understand, if you have a creditor that closes your line, it hurts your credit rating. If you carry any sort of balance, your credit rating definitely gets hurt because you’re suddenly using more of your credit line than you were before your wings got clipped. A hurt credit rating means that you will pay more for the next house you buy than you otherwise would. It means that your car insurance rates might go up. There are places that run credit checks before they will hire you. There comes a point when it stops being about their right to define the terms of the money that they lend or how they evaluate your creditworthiness and it starts being about your right to not pay a price for the life choices you make that don’t adversely affect others.

I don’t know what the solution to all of this is. Or if there is one. Disclosure is important, but vague disclosures like “We can cut your rating for any reason or no reason at all” don’t cut it. Even vague proclamations like “We can cut your rating if we don’t like your haircut” don’t do it if you don’t have any idea of what sort of haircut they would prefer you have. And I still object to “You have our services until you need them.”

But I would start with disclosures of greater specificity than we currently have. And more notice that they’re going to do whatever it is that they’re going to do so that they can plan more ahead of time for what’s coming.


Category: Market, Statehouse

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9 Responses to Bad Haircut? Here’s Your New APR.

  1. kevin says:

    If I ever write a novel, it’s going to be about a serial killer who targets executives in credit card and insurance companies. The cop investigating has a sick child, and he zeroes in on the killer just as the bad guy is about to kill the adjuster who denied coverage for the cop’s sick kid. So the cop waits for the bad guy to kill the adjuster before arresting him.

    I hate credit card and insurance companies. They pull crap like this and it just makes me hate them that much more.

  2. Webmaster says:

    “Disclosure” is insane. There is “disclosure” everywhere. If you buy a video game, you have 30 pages of “disclosure” on the “license” to theoretically read.

    “Disclosure” is crap. The reason we have government is to protect the public – yes, from external threats, but also from internal “citizen-on-citizen” abuse. It is perfectly reasonable for government to be involved in preventing the kinds of abuses you mention above, and I for one believe it’s time to clamp down.

  3. Brandon Berg says:

    The problem with disclosure is that it makes it easy to game the system. Aside from stuff that’s hard to fake (like not carrying a balance on your cards), telling people the criteria on which they’re being judged can degrade the predictive power of the model.

  4. trumwill says:

    Web,

    Even with 30 pages of disclosure, at least I have the option of reading through the 30 pages in order to pinpoint what the problem is or what to avoid. Most people wouldn’t take advantage of that (and I might not myself until it’s too late), but at least the option is there. Right now it’s almost completely in the dark.

    Also, disclosure can take on different forms. If they’re making an active change to your account, a separate disclosure unburied in paperwork submitted well before the change is to take effect would be less insulting than the current, vague disclosures that are buried in paperwork.

    Perhaps the most frustrating thing about what happened with our auto-insurance was that there was no 30-pages to dig through. That alone would have been a big help, if only so that we could go to other insurance companies and say “Hey, how much do you care about this?” or, if we know we’re on the dark side of what they’re looking for, prepare for the 50% bump in insurance auto insurance rates for whatever it was that they had a problem with.

  5. trumwill says:

    Brandon,

    That falls under “not my problem”. If their predictive power is built on things that it’s important for me not to know about… that’s the very thing I’m objecting to. It’s discriminatory in the bad sense. If the result is higher interest rates or lower credit limits across the board to recoup what they’re supposedly gaining through these tactics, that’s preferable to the current shroud of secrecy wherein we have little or no control over “services” that can materially damage our way of life.

    Obviously, the government cannot protect us from everything. If… ahem… I suddenly have to take a paycut at work because my employer is struggling. Or if my contract is cut off early. Or I’m laid off. Those too are things that materially damage me, but the alternatives are much more apparently problematic. Judging people on their income, their ability to make payments, and so on is understandable and somewhat unavoidable if they are going to have any sort of control over who they extend their credit to. However, judging people on value-neutral things that happen to correlate with problem borrowers and then not telling them about it is unacceptable.

  6. Brandon Berg says:

    Will:
    As I see it, that falls under “not their problem.” Credit card companies aren’t charitable organizations, and they don’t have any obligation to lend on term they have reason to believe to be unfavorable, even if that reason is only valid in a fuzzy statistical sense. Not to mention that we’re currently in the midst of a severe recession caused by lenders using models with inadequate predictive validity.

    Regarding the sixth paragraph, it sounds like it’s only lenders that are doing this, not credit reporting agencies, so I’m not following the argument that this could, e.g., lead to you not being hired for a job. I’d be inclined to agree with you if shopping at Wal-Mart hurt your credit rating and then employers used that to make hiring decisions, but only in the sense that I think credit reporting agencies should not be allowed to misrepresent the nature of their credit ratings. That is, you can’t ding people for shopping at Wal-Mart and then market your credit rating as an indicator of a person’s general trustworthiness. But as far as I can tell, they’re not doing that.

    By the way, why did you mention Citibank using mortgage data? I don’t see how that could even be controversial.

  7. Brandon Berg says:

    By the way, I do agree with this:

    Suggesting that you offer a certain amount of credit at a certain rate provided that you never actually need it and then pulling the rug out from under when they do is dishonest.

    It’s not clear to me why it’s even legal to raise rates on an outstanding balance, unless he was missing payments or something like that. I guess it’s legit as long as it’s in the agreement, but it’s odd that people would agree to something like that.

  8. trumwill says:

    Credit card companies aren’t charitable organizations, and they don’t have any obligation to lend on term they have reason to believe to be unfavorable, even if that reason is only valid in a fuzzy statistical sense.

    If it were the case that a lender’s decision to drop coverage did not have any effect on the borrower except insofar as the borrower cannot borrow from the lender, I would agree. But slashed credit can hurt your credit score.

    My auto insurance company, despite not being forthcoming as to why our credit history justified a 50% increase in our auto insurance rates, expressly listed having credit lines slashed as grounds for a higher premium. Correlation and all that.

    Further, if you carry a balance of $2,000 and that goes from being 33% of your credit limit to 80% of your credit limit (because your line was cut from $6k to $2500), then that affects your credit score which affects your future interest (and loan accessibility) rates when you buy a house.

    If you would prefer to attack the back end and legally prevent these sorts of things from hurting your credit score, that could be a solution.

    That is, you can’t ding people for shopping at Wal-Mart and then market your credit rating as an indicator of a person’s general trustworthiness.

    What if it’s not marketed as such, but is used as such? Credit reporting agencies may or may not represent their service as criteria for safe driving, but auto insurance companies may use it anyway because there is a correlation.

    I guess it’s legit as long as it’s in the agreement, but it’s odd that people would agree to something like that.

    Don’t the agreements more-or-less generally read that they can slash credit or raise interest rates for whatever reason they see fit except where prohibited by law? In that case, the only protection the consumer has is the big, bad arm of the law. My understanding (and correct me if I misunderstand) is that it generally works is that by failing to pay off your balance by the time the changes take effect, you’re agreeing to whatever terms they throw at you.

    I’m not necessarily entirely opposed to that, by-the-by. My thinking (at the moment, at least) is that they should have the right to do so, but that they need to give you more time to take care of that as much as you can before it takes effect. When Discover recently raised my interest rates, they gave me until the next billing period (which was literally days away). Since I never run a balance and generally like Discover, I accepted the rate change. But if that weren’t the case it could be a different story.

    By the way, why did you mention Citibank using mortgage data? I don’t see how that could even be controversial.

    Because I am not my neighbor. I should not be targeted for the mistakes that they made. If I am missing payments, that’s one thing. If my neighbor is missing payments, that’s something else.

    I am not wholly unsympathetic to the notion that they should be able to extend credit to whomever they choose. I don’t even know that I would have a problem with them declining me credit in the first place because of where I live or where I shop. I’d have to think on it. But having done so, they shouldn’t target me because of something that someone whose behavior correlates with my own on tangential matters did.

    I do understand that times are tough in the banking industry at the moment. To the extent that they do need to retract some of the credit that they have offered, I could be understanding of that, too. But in cases where it is absolutely necessary that they need to re-evaluate who they have loaned money to, they need to give us time to adjust. More than a billing period or two.

  9. Webmaster says:

    Even with 30 pages of disclosure, at least I have the option of reading through the 30 pages in order to pinpoint what the problem is or what to avoid. Most people wouldn’t take advantage of that (and I might not myself until it’s too late), but at least the option is there.

    The problem is that the “disclosure” language has gone from being mere disclosure to being deliberately obtuse, confusing, and designed to get people to say “what the hell I’ll just sign it.”

    It’s a concerted effort to trick people into agreeing to things that they never would agree to if it were presented in simple, plain language that could be read in 1-2 pages, rather than 30-40 pages requiring a law book and dictionary on hand just to get some of the words.

    Consider the case of the EULA (End User License Agreement) for software. What do you have? 30-50 pages of text, all of which has to be read from a little scrolling 300×200 pixel window (because it makes it harder to read than a normal document). The goal is to hide draconian, insane provisions (such as the “right” for the program to either (a) refuse to start up or (b) to actively delete other programs that the company dislikes).

    That’s “Disclosure” for you.

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