U.S. PIRG Consumer Blog: Behavioral scoring to set credit limits

I am getting calls from the press about credit card company use of behavioral credit scores to lower credit limits. According to press reports, American Express, at least, (MSNBC story) has admitted lowering the limits of otherwise good customers because they might shop at stores that customers who've defaulted on their cards also shopped at. I am sure other majors are also using behavioral scores. A credit score is derived from a regulated credit report. A behavioral score could be derived from a variety of unregulated information sources, including, in this case, where you use your card. "Experience and transaction" information is something that the bank obtains from your own account data. The bank can enhance it with commercially available outside data sources to develop a virtually unregulated dossier on you. Consumer groups including U.S. PIRG have long argued that "experience and transaction" information -- one of the richest sources of detailed information about you -- should be subject to greater privacy rights. It is not. I also said above that all the big banks are probably using behavioral scoring. So are the subprime lenders.

This summer, I had an entry about parallel FDIC/FTC legal actions against a subprime predatory "fee-harvester" credit card company known as CompuCredit. That firm is known for issuing low-limit cards of $250 or so with the catch of over $150 in upfront fees or more, leaving consumers with a now easy-to-exceed less than $100 limit right out of the box. In addition to calling the marketing of cards with such ephemeral limits deceptive, the agencies called a wide variety of the firm's other practices deceptive. Among these was its undisclosed use of behavioral scoring to reduce credit limits. For example, according to the FTC's complaint at page 34 :

75. CompuCredit has based these credit line reductions on an undisclosed “behavioral” scoring model that penalized consumers for using their cards for certain types of transactions, including transactions touted in their solicitation materials such as cash advances and transactions with the following types of merchants: • Direct marketing merchants • Marriage counselors • Personal counselors • Automobile tire retreading and repair shops • Bars and night clubs • Pool and billiard establishments • Pawn shops • Massage parlors. 76. In some instances, CompuCredit reduced subscribers’ credit limits to levels below their existing balances and then charged over-limit fees.

Above, I called credit reports regulated and behavioral scores unregulated. The Fair Credit Reporting Act grants you a number of rights in credit reports including the right to look at and dispute your file and the right to a free report after credit denial (this last right is only triggered when a potential creditor denies you, however, not when an existing creditor changes your terms). On the other hand, the Gramm-Leach-Bliley Financial Modernization Act gives you few rights. It says that banks can use and share "experience and transaction information" even if you don't want them to do so. The growth and consolidation of financial behemoths triggered by the financial crisis could lead to even more development of unregulated internal dossiers or profiles. The new Congress, in its examination of longer-term responses to the financial crisis, should examine whether our once robust credit reporting rights are being diminished by the growing use of unregulated database information to make credit decisions. Of course, whether those supposedly rights-less unregulated databases actually constitute regulated credit reports should also be examined more closely.