Now it looks like American Express may be cracking down on credit risks, and Kevin Drum is mad:
Here's the latest reason to hate credit card companies: Shop at Wal-Mart, obviously a sign of financial distress, and your credit limit gets lowered. Hallelujah!
This is from American Express, which has now decided to hunker down and simply lie about their habit of doing this. Compare and contrast the following news accounts. When Kevin Johnson returned from his honeymoon last year he got a letter from Amex saying, "Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express."
This is what credit management looks like: you try to shut off access to the poor. Poor people have less financial cushion than wealthier people, and they are therefore much more likely to default on their debt.
(Yes, I know, there are a lot of affluent people who live up to--and beyond--their means. But it's easier to pull Emily and Silas out of Sidwell Friends and sell the second car than it is to send little Maria to PS 187 without shoes; 90-95% of people who declare bankruptcy are below the median income for their area.)
You can't have it both ways. Either you want credit card companies and mortgage originators to do everything they can to keep credit risks out of their system--which means identifying people whose shopping patterns indicate financial trouble--or you want them to extend too much credit. The sad fact is that becoming a more responsible lender is largely synonymous with discriminating against the poor.
I never bought into the notion that expanding credit was bad for poor people (though I now realize it wasn't good for the economy as a whole). So the cutbacks make me uncomfortable and sad. But that's one reason I can't get too mad at banks for extending the loans in the first place.
It seems odd to me, because a switch to WalMart and frugality might signal a responsible customer.
On the credit dilemma, I've been down on debt, and have had a few exchanges over the years with libertarians or economists who basically said debt was good because someone, somewhere, might be using that payday loan or 6 year SUV loan responsibly.
"someone somewhere" didn't cut it, and that's what brought this down. Theory, meet Practice.
"Shopping at Walmart" = "freeloading non-paying scum" ??!!??
For many reasons, I am not a fan of Walmart (I will go there for my mother, or getting hard-to-find things for my siblings' kids, but that is about it), but putting in a global rule of "use our card at Walmart, and you will be cut off" is ridiculous.
Today I'll call Amex to find out where else I shouldn't be shopping. I mean, who knows? Maybe buying at Saks is a sign of fiscal delusion? McDonalds (especially with my record of eating at Wendy's or Hardees) could flag me as one of the looming poor/freeloaders*.
(* Equating "poor" with "freeloaders" is pure sarcasm.... "Frugal" would be a better choice, but just doesn't make the same point)
Either you want credit card companies and mortgage originators to do everything they can to keep credit risks out of their system--which means identifying people whose shopping patterns indicate financial trouble--or you want them to extend too much credit.
Credit risk is a function of income and repayment history. It isn't supposed to be based upon an undisclosed blacklist of merchants that operate legally in the US. I would hope that the comment is inaccurate and that AmEx isn't conducting its business in this fashion.
There is certainly nothing wrong with having reasonable criteria, but that requires that the criteria be reasonable. What's better, a payment for WalMart purchases made on time, or a stream of delinquent payments on one's Porsche 911?
Didn't another economist state "There are no free lunches, only tradeoffs." Or something to that extent.
Shouldn't credit management be driven by payment history rather than by shopping outlets? Surely many more people with fine ability to pay will be shopping at Wal-Mart in the coming year. Their algorithm appears to lag reality to the point of humor.
Soon: "Customers who start buying cheaper grades of gasoline have a poor repayment history."
Future: "OnStar monitoring noticed that last Thursday you drove past three gas stations to find the cheapest price. We're reducing your credit line accordingly."
Doesn't this go to show that the banks are floundering and not using common sense in their business dealings. I mean, it's one thing to use credit scores and other outstanding debt in order to change your credit line, but to use specific purchases?
These are the type of tactics that got the credit industry in trouble in the first place. Let's think about the other things the big banks and credit lenders have done this year: http://www.tv1.com/playlists/211
Meghan I think you generally do an excellent job providing reasoned and thoughtful analysis about the economics of debt, though the prism of libertarian thought. I regret to say this post is complete trash and more patrisan than I'd expect from you. Kevin Johnson got his limit lowered for shopping at the "wrong merchants" which are never enumerated my Amex, despite an excellent payment history and credit score. More importantly, the use of behavioral scoring is neither disclosed, nor pursued in a manner that is consistent or transparent. The reason for this is likely that it would be rather unfair for credit card companies to list explicitly the stores that they flag without having repurcussions for those merchants. As a "card-member" I find it troubling not that my limit can be lowered, because it's fairly clear that it can in accordance with the terms of my agreement, but that it can be lowered for something I have absolutely no control over. I cannot avoid merchants that could lower my limit because I DON'T KNOW who they are. Either be more explicit so when I shop there I can pay cash or use my visa, or take that part out of behavioral scoring. Finally, it seems that maybe the idea that credit limits ought to be lower is somewhat counter intuitive given that there is a credit crunch going on? While companies certainly do have rights to do this, the manner in which Amex treated Mr. Johnson does seem unfair, particularly when you consider that debt ratio is one of the factors in your credit score. I thought it funny how Amex backed off on the idea that some "merchants" weren't the reason, but refused to say what was. Your tone about "the left" detracts from your credability on this issue, since it's pretty clear Mr. Johnson got shafted here, and he wasn't told why. While you link to Mother Jones, this situation was first covered by other newspapers. I'm sure they're ticked, but wouldn't you be mad if you got your limit lowered for no reason, then given the run around when you tried to figure out why? Why not highlight Mr. Johnson's setting up a website to keep consumers informed about changes in laws that could affect them rather than some venting at Mother Jones?
Of course, it's also possible to pursue a middle ground: only judge a person by their own credit performance. It's like with auto insurance: one strategy the insurance companies like to use is redlining - refusing to insure people living in certain zip codes because of how badly the other people there have driven in the past. But, even if they are prohibited from doing that, there are other ways to evaluate risk, like just looking at each individual's driving history.
Same thing with credit. Just look at the actions of the person in question.
While I'm not sure I believe this report, to the naysayers....
Shouldn't driving insurance be linked to actual driving record and not, ya know age, eye sight, gender, state, etc?
Well, not really. It makes sense to assess risk, to a certain point. If Amex looked at their database and I'm sure its a wonderful database and noticed that 40% of Walmart shoppers with Amex cards don't pay their bills, it would be a good way to assess risk and limit the amount of credit available to that type of shopper.
So if your shopping behavior is perceived as more risky, then they limit the amount of credit they will extend.
Is it a good idea? I don't know. I think with Walmart it is probably a bad idea. I don't want to mess with the company that employees the most people in the US. And whose stock actually made GAINS in 2008.
Of course, this could just be tit for tat. Maybe Walmart forced a lower processing fee on Amex, or you couldn't use Amex cards at Walmart. So Amex retaliated... against its own customers? Ya I don't understand either...
But I'm sure if Walmart hasn't acted on this they will be soon.
To be a leftist is to deny the reality of hard choices. This is nothing but a good example of the tendency. Loaning money is hard. You have to say no to people. You have to get people to face the reality of their financial situation. It means having to tell someone that gee maybe buying that dream house or care or vacation is beyond their means. Yet at the same time, banks have to lend to someone to make money. That is tough.
Leftists, since they refuse to face such decision, instead chose to believe that banks shouldn't have to make such decisions. That they can on the one hand lend money to anyone and everyone in the name of social justice and on the other hand keep their balance sheets in order. Leftists look at credit the same way they look at housing, healthcare, and every other facit of the economy; a free lunch that should always be there and only isn't because of greedy capitalists. Think about it. The leftist view of healthcare; everyone should have all the free healthcare they need. Really? Even hypocondriacs and people who refuse to work or do anything to help themselves? The leftist view of employment is that everyone should have a job that pays a "living wage" and everyone should have lifetime employment security. Really? Even those who refuse to work and even those who work in obsolete or unproductive industries should never lose their jobs? Their view of credit is no different; everyone should have access to all the credit they need, even those who can't pay, and the banks should always be solvent.
Back in the 80s, when the flavor of the month in computer software that was going to Transform American Business was Artificial Intelligence, specifically Expert Systems, AmEx was a frequent case study.
They had a very sophisticated fraud detection system that operated on several levels. At the lowest level, there were the standard kinds of cross checks of amounts vs. the (hidden) limit an AmEx card has. There were geographical checks. I once had a trip where I was in three cities in one day, used the card in each of them, and at the third city the merchant was asked to call AmEx for verification. I answered a few questions, produced ID for the clerk, and went on my way. Someone tried to use my wife's identity to open an AmEx account, they called us to verify that we really hadn't moved from a house in a nice neighborhood to, well, a cheap apartment in the 'hood.
Some transactions got kicked up to humans for approval. They were trained to look at spending patterns and decide on transactions. They had a project to inteview the best of these analysts and encode their techniques in an expert system to automate the process or assist the other analysts. This was only possible because they have a huge data mining operation. My guess is that if they see someone go from shopping at Macy's, Gap, etc. for clothes to Wal-Mart, it raises a flag. If a Wal-Mart shopper's card shows up at Neiman-Marcus or Nordstrom, it raises a flag.
There are probably a lot of Platinum card holders in NYC that lost their jobs and are bad risks, so what should they do? Let them run up huge tabs, some of which could be the size of mortgages, and go bankrupt?
Profiling clients, based on their shopping histories?
How long before other data-base information is used to profile you and determine your worthiness? Phone calls made, legal snafus, even the pictures taken of your license plate at toll booths? Soon, your very genome.
Do I get a break from the Wal-Mart rule because shopping there saves gas? There are three of them within 20 minutes. Other dept. stores are an hour or more away, the closer ones driven out of business by competition from Wal-Mart.
I feel like I've fallen into a Philip K. Dick novel. Substance D, anyone?
I'm all for better risk management, but something about this seems wrong. I think part of it is that you expect your credit card company to operate like a common carrier for your purchases. So long as you are buying from a merchant that isn't likely to defraud you or the credit card company then you expect the credit card company to treat the purchase like any other. For AMEX to scrutinize the substance of purchases and lower limits as a result seems against the rules and unfair. As a credit card customer I don't want to have to wonder if each purchase I make is going to trip some wire in the data mining algorithm and trigger some adverse consequence.
"As a credit card customer I don't want to have to wonder if each purchase I make is going to trip some wire in the data mining algorithm and trigger some adverse consequence."
As a customer what will you do in response? Get pissed off and use your credit cards less and pay more with cash, which is clearly not the effect AMEX is looking for. There is something of a self correcting nature to this. Banks were too easy and got burned. Now if they get too hard and start harrassing paying customers, they will lose business and have to back off. I don't think we will end up in a Phillip Dick novel.
In the 70's I was lazy and too "personal finance" rather than "economics" for the GE requirement. They told us then to apply for credit cards, but not to use them, to put them in a drawer for a rainy day.
That worked then because credit card companies didn't have the technology to turn off your credit cards in a drawer on that rainy day.
I guess we can adjust. Keeping a savings account was always more prudent than cards in a drawer anyway.
(If you bury anything in the backyard, make it gold. There's a reason a non-reactive metal became the standard. Water gets in, money rots ... I've been hearing stories of that from the Vietnamese community.)
If Amex looked at their database and I'm sure its a wonderful database and noticed that 40% of Walmart shoppers with Amex cards don't pay their bills, it would be a good way to assess risk and limit the amount of credit available to that type of shopper.
If that's true then there are likely other factors in their personal credit history that could be used instead. So, instead of screwing 100% of Wal-Mart's customers you tease out why 40% of those have a poor re-payment history.
To be a leftist is to deny the reality of hard choices.
BS, I know the reality of hard choices. Please stop getting your talking points from Rush. If Amex wants to deny credit to the poor, I don't have a problem. However, I prefer that their criteria needs to be based on that person's history. At a minimum if they are going to use merchants as a guide they need to clearly state which merchants so I can avoid them.
"This is what credit management looks like."
Since when?
I've always been under the impression that credit management has been based on things like outstanding debt and repayment history.
I'm also a bit nonplussed that you think that responsible credit management is all about getting the poor out of the system.
Again, I was under the distinct impression that it was about removing people who have bad credit ratings (which will, of course, include a disproportionate number of poor people).
Do you really think that blacklisting merchants is the best way for Amex to accomplish their goals?
I know that if I were Walmart's management, my first response on hearing this would be to drop our support of American Express since it's clear that Amex is actively trying to discourage our customers from shopping there.
The implication is often that this was all some sort of scheme to get working stiffs into debt slavery.
Yes, that is exactly what is was. The credit card issuers got Congress to tighten bankruptcy law so that it became almost impossible to shed credit card debt, then sent millions of credit card applications to anyone with a pulse.
Predatory credit card lending was a good business until collections couldn't keep up with the debt. Megan never talks about predation, because that is ideologically inconvenient. She never talks about why credit card agreements are often printed in nearly invisible GRAY ink on the back of monthly statements.
Megan has probably never looked at a construction diagram of a slave ship and seen the coffin-like dimensions of the storage compartments. These were designed for businessmen who preyed on human beings. There is less physical brutality today, but the predatory behavior continues.
Megan believes that it is her mission to protect the powerful against the weak and to defend the rich against the poor. It is hard work, but it pays well. The rich reward their defenders much better than the poor.
There is a scene in The Smartest Guys in the Room about the bankruptcy of Enron. The climax of the story is the day they are about to file for bankruptcy, just before they do, someone cries out, "Draw down the revolvers!"
What that means is, draw down the revolving lines of credit. Corporations pay millions of dollars a year to maintain billion dollar lines of credit with banks, the banks know that they will only be called upon to provide this credit in times of significant financial stress.
I think many of us feel that with all the fees and interest we pay to the credit cards companies they should be comitted to us in good times and bad, just like commercial bankers.
I don't know how rational that is, but it's how I feel.
BTW Megan, how do you see the credit card companies escape to Delaware (from other state's usury laws) nowadays?
It was easy for libertarians to use the "someone somewhere" argument(*) that steep credit has a place a few years ago, but you have to be ... a naturalist who does not go to the field ... to miss how it worked out with human cardholders ... in the wild.
* - as above, "Someone somewhere might need and responsibly use these cards with their steep rates. Hey, maybe they are going to med school!"
I can understand (but disagree with) the privacy (overblown) and fairness (sigh) arguments.
But the efficacy arguments seem silly, frankly. A bunch of blog posters are second-guessing the data on which AmEx is using? Without seeing the data? And based only on an a gut feeling that the opposite "seems" more likely (in their vast experience underwriting debt)?
I will assume instead that AmEx found something in the spending data that showed WM shoppers to be a slightly higher default risk, and adjusted their credit portfolio accordingly.
And for everyone who wants credit card (and whatever) decisions to be based on them, and them alone (beacuase that's what's "fair") -- think about what that means. Ever applied for a home mortgage? Even that process, which is (or at least should be) intrusive as can be, and very costly, makes a TON of assumptions based on how your history relates to historical data.
Do you really want a system where it takes four weeks and a $1,000 app fee to get you a credit card?
As a customer what will you do in response? Get pissed off and use your credit cards less and pay more with cash, which is clearly not the effect AMEX is looking for. There is something of a self correcting nature to this.
I know that this will strike you as a crazy idea, but assuming that AmEx is actually behaving in this fashion (and I don't know that it is), then perhaps it should disclose it in advance so that a customer may decide for himself whether or not to use the card with that merchant.
Turning a shopping trip into a ex post facto FICO surprise makes no logical sense at all. If true, it makes AmEx sound less like a financial services company and more like a fickle girlfriend, who scowls at you and makes you sleep on the couch because "you're supposed to know" what you've allegedly done wrong. Nobody needs that sort of drama just to use a credit card, particularly those who have good payment histories.
Or, this could be even more wacky, but if AmEx is terrified by the sorts of folks who shop at WalMart, then cut the merchant agreement with WalMart altogether. If dealing with SprawlMart is risky business, then cut the risk by cutting the business.
xyz,
Why do you have so much sympathy for the ingnorant and foolish?
Megan is right. Credit management is like that; all too often. If I had shares in American Express, I would sell them. Credit mangement should be based on notions of causation, not correlation. Trying to cut your risks using just any sort of correlation will drive out good business with the bad.
"Predatory credit card lending was a good business until collections couldn't keep up with the debt. Megan never talks about predation, because that is ideologically inconvenient. She never talks about why credit card agreements are often printed in nearly invisible GRAY ink on the back of monthly statements."
The bankrupcy reform was completely immoral. The credit card companies continued to give credit to completely un credit worthy people and then go Congress to cut off their only excape route.
Of course the flip side of getting angry at banks for encouraging people to take irresponsible debt, is to not get angry at them when they start enforcing credit standards again. How about this compromise? We go back to the old system of bankruptcy where people can walk away from their unsecured debt but in return we let credit companies use whatever means they feel necessary to eliminate bad credit risks? That seems fair to me. Yeah, it sucks when some genius comes up with an algorythem to deny credit, but as I said above that tends to work itself out. If the algorythem punishes good risks, it won't work for the company.
Byrk,
Anyone who invokes the name of Rush Limbaugh in an argumeent is a jackass who has nothing of substance to say. Thanks for mentioning his name early so I didn't have to bother with reading the rest of your post.
xyz wrote: Megan has probably never looked at a construction diagram of a slave ship and seen the coffin-like dimensions of the storage compartments. These were designed for businessmen who preyed on human beings. There is less physical brutality today, but the predatory behavior continues.
Megan believes that it is her mission to protect the powerful against the weak and to defend the rich against the poor. It is hard work, but it pays well. The rich reward their defenders much better than the poor.i>
Oh good Lord. Demagauge much? Put down the Che biography and talk like a grown up.
I think part of it is that you expect your credit card company to operate like a common carrier for your purchases.
If you expect that, you're living in a dream world.
For AMEX to scrutinize the substance of purchases and lower limits as a result seems against the rules and unfair.
What rules are you talking about? Who made them? More to the point, who enforces them?
As a credit card customer I don't want to have to wonder if each purchase I make is going to trip some wire in the data mining algorithm and trigger some adverse consequence.
Well, what you want appears to have nothing to do with it.
"As a customer what will you do in response? Get pissed off and use your credit cards less and pay more with cash, which is clearly not the effect AMEX is looking for. There is something of a self correcting nature to this."
Agreed. On the margin, heavy handed risk management like this would make me change credit card companies or switch to debit purchases, and I think that is sufficient to regulate the practice. I'm also skeptical that a model like this can accurately predict defaults in people, on shopping patterns alone, when they are not near their limits and have not been late on any bills. For this type of forecast to work it would be predicting defaults at least 6-12 months in the future and without any rock solid evidence of financial distress. Maybe I'm wrong, but this seems like it would generate a lot of false positives.
Credit mangement should be based on notions of causation, not correlation.
Do you know this to be true? Because it conflicts with every single thing I understand about underwriting. (Which is very little, admittedly).
What do you have against me going to Sidwell friends????
More seriously:
Becoming? No, Megan_McArdle, nothing has changed here. Nothing. The supposed industry-wide stupid lending was actually confined to large banks. Credit unions seemed to lend just fine over that time period, accurately taking the poor's default rate into account, and didn't need any bailout whatsoever, except maybe to compete with less scrupulous CUs that took bailout money they didn't need.
Many non-profit and even for-profit lenders are still making loans to the poor just fine, because they use actual thought rather than an outdated, gamed algorithm.
Large financial institutions have to overreact, perhaps leading to the atrocity of circa-1998 lending standards. But smaller institutions needn't be so overcautious; they didn't foul up in the first place.
Anyone who invokes the name of Rush Limbaugh in an argumeent is a jackass who has nothing of substance to say.
Then don't make broad attack statements about leftists with little basis in reality. That's the type of thing you'd hear on Fox News or right-wing talk radio.
BP Beckley,
Of course credit card companies don't have any actual legal obligations to operate as common carriers. And I'm sure there contractual obligation to their customers allow for this type of risk management. At the same time, however, I think a norm has developed where people expect their credit card companies to operate more or less as common carriers. I think the anger this alleged practice has evoked is evidence of that. AMEX should do what it wants in this department, but I don't think the consumer anger is unjustified.
Shopping patterns can very reliably indicate financial trouble--if you used to shop at Crate and Barrel and Harris Teeter, and have suddenly switched to Wal-Mart, well, maybe you just got frugal, or maybe you're having trouble making ends meet.
Think of it this way: why does Geico use your credit score to decide whether to issue you insurance? Your credit score doesn't tell Geico a thing about your driving ability. But it does tell Geico about your impulse control, and your incentives to make false insurance claims.
After they've issued you the card, the creditors don't know what your income is--thus, they must rely on other signs that you might be getting ready to default.
Yes, that is exactly what is was. The credit card issuers got Congress to tighten bankruptcy law so that it became almost impossible to shed credit card debt, then sent millions of credit card applications to anyone with a pulse.
As a (corporate) bankruptcy attorney, I'm here to say that this is one of those myths of the left with virtually no basis in reality. As always, credit card debt is dischargeable via 7 or 13. BAPCPA requires credit counseling, and pushes more people into Chapter 13 (payment plan) instead of Chapter 7 (liquidation).
Student loan debt, on the other hand, actually is almost impossible to shed. Not saying that's good or bad, just trying to get some facts out there.
I think you hit the nail on the head, db.
I'm the consumer that Amex wants. I have, literally, zero outstanding debt, a very good income, and an excellent credit rating.
Now that I know that this how they're doing business, I'm going to think twice about continuing my relationship with American Express. I may very well end up canceling my Amex because I do not approve of this treatment.
XYZ, its a common misconception that it is "almost impossible" to shed credit card debt.
This is bullshit, pure and simple. For people below the median income of the state, it changed nothing. For people above it, they have to pay some portion of the credit card debt off @ 0% interest, depending on how much money they make and their expenses. The propaganda against the 05 law has done a lot more to scare people away from bankruptcy than the law itself did.
"Shopping patterns can very reliably indicate financial trouble."
I assume that you have some citations to back this claim up, Megan? I needn't remind you that the plural of anecdote is not data.
If credit card companies have identified merchants that attract poor credits, why do they allow their cards to be used in those stores?
Using your example, If AMEX feels Wal*Mart customers are dead beats, just don't allow the card to be used at Wal*Mart. Dead beats avoided.
It's been a long time since I had an Amex card but, is the AMEX card a credit card? In the old days you were not supposed to leave a balance on their card.
Why are we looking at it thru a left/right prism?
Either this is a good idea, in which chase amex is well within its rights to do so, or more likely, this is a bad idea and amex will loose customers to its competitors.
only judge a person by their own credit performance
People keep telling me how wise America is to be so forgiving to bankrupts. That is, people with a history of poor credit performance.
Personally, I have no idea how AmEx does or should make judgements about credit risk.
But I do note that when AmEx makes such judgements, it is risking its own money.
When people on this thread make assertions about how AmEx should make such judgements, they are making claims about how they would risk their own money, if only they were in AmEx’s business.
This does not give me too much faith in their judgement. It is very easy to make claims about how nice you would be to customers for an industry, if only you happened to be in that industry.
Access to credit is not a right.
And I truly never understood why people carry balances anyway. The entire credit card industry appears to be based on the fact that there are way too many idiots willing to pay interest and penalties.
Yancey,
"And I truly never understood why people carry balances anyway."
Liquidity.
With all this talk about credit card companies cutting back on credit lines, I assume people are doing the following: When You have 10k in credit card debt and 10k in your savings account, you can do one of two things:
1. Pay off your credit card and have $0 in the back and potential access to 10k in debt.
2. Keep your credit card balance and have access to that 10k.
People fear that if you pay off your 10k credit card, next month you will find a note in the main that your limit is now $1500. Next week they call you in and tell you you've been laid off - what do you do then?
Now, obviously it might make sense to pay off 5k and keep 5k in the bank... but people do consider their personal circumstances.
A lot of people are saying that credit history should be the primary factor. But credit history can be a poor indicator of current ability to pay back loans. The system has been gamed extensively - there are various ways to make your credit history look better without any change in your fundamental financial situation and the recent economic downturn limits the significance of how well people paid down their loans when the economy was in decent shape to currently and casts doubt on the reliability of the usage of credit history as condensed via credit rating.
That said, I think this plan will backfire on them. It's even easier to game, so soon not shopping at Walmart will be correlated with fear about one's credit lines, which is most likely correlated with limited ability to repay.
Oddly, transparency in how credit risk is assessed is in tension with how far credit can be reliably extended. The better people know the system, the better it can be gamed, so the less reliable it becomes. I don't think this is an argument for limiting transparency in and of itself (there's a lot of reasons transparency is good) but it should be kept in mind.
And for everyone who wants credit card (and whatever) decisions to be based on them, and them alone (beacuase that's what's "fair") -- think about what that means. Ever applied for a home mortgage? Even that process, which is (or at least should be) intrusive as can be, and very costly, makes a TON of assumptions based on how your history relates to historical data. Do you really want a system where it takes four weeks and a $1,000 app fee to get you a credit card?
This ^^.
A year and a half ago I went to my bank in good standing to request a credit card. Based on the fact that they already had my banking history and personal data on record, a personal banker was able to click a few buttons and it arrived in the mail within a week, carrying a $5k limit that has since been extended above $8k due to good performance.
Three months later, I found a used car and went back to the same bank to seek out a three-year, collateralized personal loan. The rules said that they could lend a maximum of the wholesale trade-in value of the car ($4600) and required an approval process. Approval having been done, the loan required a $75 origination fee, thirty pages of paperwork, and five or six signatures throughout. The bank, of course, holds the vehicle title until the loan is paid off.
The first scenario is what fair and equitable lending looks like when the lender is allowed to use discretionary risk management over time. The second scenario is what fair and equitable lending looks like anytime the bank knows it has to do all of the risk management at the time of origination.
Pick your poison and learn to tolerate the flavor, because there is no magic alternative.
Yes Yancey, it does not make sense to carry a balance, esp. for normal expenses. This is where Homo Economicus meets Behavioral Finance.
So what do we plan for in the future? Fiction or reality?
aMouseforallSeasons, that is a great comment. Thanks for sharing all that.
There are two issues here: First, does AmEx's practice provide it with good information for making credit decisions? Second, should AmEx be allowed to use information about shopping behavior in making credit decisions? With regard to the 1st issue, AmEx is in the best position to judge whether or not its current practices produce good information or not. Without access to its proprietary data base and algorithms, none of us are in a position to judge (even if we were to assume we have the ability to understand the algorithms and data). Given that AmEx has been using and refining these methods for years at great cost, the smart money is on AmEx having a reasonable basis for believing its methods produce good information. Other card companies use different data and different methods. If AmEx has made a material error (and is turning away reasonable credit risks), other companies will exploit that error.
With regard to the 2nd issue, I'm surprised that so many are willing to substitute their judgment for AmEx's. As a society, we've said that certain characteristics cannot be used in making credit decisions, such as race, gender, ethnic origin, and religion. Note: Some of the prohibited characteristics produced useful credit information -- we just insist that this information be ignored. Are we going to add shopping behavior to the list of things to be ignored? Walling off this information will have significant societal costs (assuming the information is useful in making credit decisions). We were willing to incur those costs to avoid the "evil" of basing credit decisions on race. I just don't see shopping behavior as falling into the same category. YMMV.
There are two issues here: First, does AmEx's practice provide it with good information for making credit decisions? Second, should AmEx be allowed to use information about shopping behavior in making credit decisions?
There is a third issue -- informing the consumer in advance that a trip to buy cleaning supplies or a loaf of bread at the local low cost provider could ding his credit score and restrict his future debt capacity, even if he makes his payment on time and in accordance with his cardholder agreement.
As consumers, we should know the strings attached and be given the opportunity to manage our behavior accordingly. Just as we can't arbitrarily and unilaterally change our payment terms just because that might suit our whims, a creditor shouldn't be able to change the rules of the game without telling us that they intend to do it.
Disclosure should be mandatory, unambiguous, and made far enough in advance to allow for a response. Otherwise, it's just gamesmanship and a form of abuse.
It seems to me Drum is less outraged by the tightened credit than he is by the goofy means by which the credit card company determined he needed his credit tightened.
And if you don't agree that this is a goofy method, try the opposite: If I regularly eat at Charlie Trotter's (replace with whatever restaurant in DC costs $250 a head for dinner, plus wine) is that an indication that I am credit worthy, because a lot of rich credit worthy people eat there? Will I get a better credit limit or credit rating just for having eaten there?
I think we all know the answer to that question, and I think we all know the reason why.
When Kevin Johnson returned from his honeymoon last year he got a letter from Amex saying, "Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express."
Is there a verifiable copy of this letter or is the media taking Johnson's word for it? On its face, it isn't credible.
I shop at Walmart somewhat frequently with my Amex card and my credit has not been terminated.
We should be grateful to Walmart for its role in holding down inflation, providing low price for low-income shoppers, and providing a widely copied model for inventory management.
Interestingly, AmEx just ran a promotion with Wal-Mart this past holiday season -- a cash back reward for using the card at Wal-Mart.
"There are two issues here: First, does AmEx's practice provide it with good information for making credit decisions? Second, should AmEx be allowed to use information about shopping behavior in making credit decisions? With regard to the 1st issue, AmEx is in the best position to judge whether or not its current practices produce good information or not."
I think that anyone who takes it on faith that experts and institutions know what's best for themselves really ought to read "The Black Swan".
Indeed, didn't we just have a major financial melt-down that was predicated on the failure of experts and their oh-so-sophisticated risk models?
Be that as it may, I don't think that anyone in this thread is denying that American Express has the right to use consumer purchase information as a way of evaluating credit risk (even if some of us are, indeed, questioning the wisdom of doing so).
I believe that the central objection is one of transparency. If shopping at Wal*Mart is going to impact my credit rating -- an impact that extends well outside the realm of what my APR is for a given card -- I should know that fact and I should be able to plan accordingly especially given that I have had no reason, prior to this, to suspect that my purchase history could be used against me.
I also think that merchants who are being red-flagged by Amex should be able to know this fact so that they, in turn, can make informed decisions about whether or not they want to honor American Express cards at point of purchase. As I said previously, if I were a Wal*Mart executive, I'd be thinking twice about supporting a card that's penalizing my customers for shopping with me.
That said, I do wonder how deep this Libertarian impulse to defend American Express' right to make credit decisions on any criteria they see fit goes. As a hypothetical, would you Libertarians be at all concerned if Amex started marking down credit ratings based on, say, the titles of books that the consumer has purchased?
Is there any hypothetical limit where you would start to feel concerned about your privacy, or do you have no qualms what so ever regardless of how far they dig down?
Disclosure of the exact methods and rules used, above and beyond "we reserve the right to change your credit limit based on your buying patterns and other information we have about you in our data base", would be counter-productive. It would freeze the system, preventing the companies from updating their methods based on changes in the market. It also would seriously degrade the usefulness of the system. If consumers knew exactly which behaviors might trigger a credit adjustment, they could easily game the system. Disclosure of methods would also grant competitors the ability to exploit those methods.
I understand the concerns about fairness. I just don't think the steps necessary to address those concerns are worth the costs.
Marcus,
I am not sure what answer you are looking for. In my case, as I spent a lot of credit cards (travel, week long stays at residence inns 10 times a year) my credit limit worked its way up to 20k on my personal cards.
I paid my balance every month though.
So the answer to your question would be... if you spend a lot regularly at high dollar establishments combined with paying off your bills, your credit limit will go up.
The idea that you can't criticize the mortgage lending and securitization industry without also implicitly endorsing discrimination against Wal-Mart shoppers is so stupid that it's hard to imagine how an intelligent person could offer it up in good faith.
Was there ever confirmation that it was Walmart that triggered this from Amex? The letter that Kevin Johnson received did not specify a merchant. So why the assumption of Walmart? Was it simply that it was the only thing in the guy's recent history that would suggest that?
Matthew,
From what I read, I think in the New York Times, it was things like marital concelors, divorce lawyers, rather than walmart.
But I would have to say, for all those business travelers out there, if AMEX sees that you used to be charging a hotel, rental car, and plane ticket every week 40 weeks a year, and now you are charging to use the wifi at the starbucks down the street, it might mean you got laid off.
I believe that the central objection is one of transparency. If shopping at Wal*Mart is going to impact my credit rating -- an impact that extends well outside the realm of what my APR is for a given card -- I should know that fact and I should be able to plan accordingly
Many, many people have said this. But if you get told in advance what will reduce your credit, you won't do it, thus destroying the usefulness of the credit indicator. What you're suggesting is that Amex build a model at great expense and then trash it by telling everyone what's in the black box.
Megan:
You've missed the mark on this one. Lenders finding new ways to mine data to black list people is not the same thing as taking reasonable steps to ensure that they are carefully assessing risk. FICO scores, payment history, outstanding credit, income, etc. are all available to these lenders. They are now trying to make up for not having done appropriate underwriting in the first place, and doing a very poor job of it. It is unfair and unreasonable for those that pay on time.
This just proves that better regulation is necessary. Lenders need to underwrite appropriately, and they need to disclose their underwriting criteria in full to anyone seeking credit.
If credit card companies have identified merchants that attract poor credits, why do they allow their cards to be used in those stores?
Presumably because the data isn't that strong. They don't deny credit to WM shoppers, they just slightly lower their credit limits, to (in Amex's view) reasonably balance their risk portfolio.
There is a third issue -- informing the consumer in advance that a trip to buy cleaning supplies or a loaf of bread at the local low cost provider could ding his credit score and restrict his future debt capacity, even if he makes his payment on time and in accordance with his cardholder agreement.
Not really. Amex is trying to accurately predict the likelihood that you default, not shape your spending habits. This, as someone mentioned above, is the difference between correlation and causation. Amex believes there's a correlation b/w WM shopping and default. They DON'T believe that shopping at WM causes you to default.
If they announce that shopping at WM results in a lowered credit limit, the factor becomes less useful. Some percent of the bad risks will now shop at Target, or Dollar General, or whatever. Gaming the credit system is perhaps good for the individual consumer, but it's not good for the lender.
Lenders finding new ways to mine data to black list people is not the same thing as taking reasonable steps to ensure that they are carefully assessing risk.
You got me - what's the difference? All I can see is that you used the word "blacklist," which I guess is supposed to be bad.
Since, as was reported above, AmEx and Walmart had a joint promotion this past year, I seriously doubt shopping at Walmart is viewed as a negative by AmEx. Instead, I suspect the credit issue was the result of a number of behavioral changes (only one of which was shopping at Walmart) that AmEx noticed and acted upon. Recall, the cardholder in question had recently gotten married. Perhaps the volume on the card suddenly increased above prior norms (as might happen when combining purchases for two people onto one card). In addition, the mix of stores shopped at may have changed significantly (as might happen when two people's goods are being purchased with one card and when setting up a new home). Etc., etc., etc. All of these things, in combination, caused bells to go off at AmEx. Shopping at Walmart, in and of itself, most likely did not set off any alarms.
At the risk of spamming and as well injecting some actual information about what the Journalist likely ignorantly garbled, as I noted on Drum's initial posty:
Leaving aside the usual Leftist wailing (that is, anything companies doing BAD,), regarding the monitoring, while I am not familiar with what American credit card issuers do specifically, being moderately familiar with similar programmes elsewhere, I believe that both the arty and most comments are misplaced and there is serious misunderstanding of what is going on.
What is likely being done by AMEX and others is dynamic monitoring of changes customer buying patterns; not that buying in specific stores is blacklisted (that would be far too crude), but that significant departures from past history (of usage in terms of amounts, retailers, etc). Thus, if you are a Platinium Card owner who ALWAYS shopped at mass retailers with said card and are more or less in the same buying patterns, the behavioural analysis engine doesn't flag you, you're not changing. However, the Platinium Card owner that typically shopped at High Street merchants and is suddenly going down-market, in general that is a huge red flag. Insofar as it is terribly expensive (and often inaccurate) to have individual analysis, the engine reduces (but of course can also move back up if the pattern is stable...).
I find it bizarre also the complain supra about fraud flagging on the overseas trip; I get fraud flagged constantly insofar as I spend 90% of my spending in emerging markets, on business. And I am damned glad of it, this is a significant tool contra 419 frauds in Africa and MENA, and fraud reduction means cost reduction and more affordable credit. That some behavioural engine flags me and forces an explanation every few months, while annoying, is useful (esp. in African and MENA markets where you're an idiot to walk around with too much cash).
This is a perfectly reasonable credit quality monitoring programme for unsecured credit, and PRECISELY the sort of attention to credit quality evolution - you know good lending standards that most commentators here have wailed on about during the credit crisis. (I shall not try to defend the indefensible retroactive changes in card agreements, post-facto interest charges, etc - all that is clearly abusive and inexcusable) Bank lending systems for unsecured credit - the data mining capacity mentioned - are key to allowing for affordable unsecured credit.
UNSECURED being the key, as I work in emerging markets largely, I can assure you it is a fine luxury, of great utility, but a fragile product. Proactive monitoring of changes, and comparison with historical averages can detect a borrower "going south" and it is prudent for both borrower and bank to reduce credit (yes, of course that borrow may 'need' the extra money, but given likely loss, the bank should not lend it for the borrower's own good and the general quality of credit.)
While yes there may be 'false' positives if a borrower suddenly changes behaviour in a way that suggests statistically they are becoming 'distressed' but is in fact simply moving to a more conservative spending position, well it is hardly the end of the world to have one's unsecured credit line reduced. The same behavioural analysis engines also lead credit lines being increased, and the improved management overall means less losses which means... more stable lending entities. I believe there has been some whinging on of late about losses, yes?
In reading then Drum's complain and the wailing here, it strikes me you all bloody want Magical Ponies. Banks must lend, but they must also be prudent, oh yes, but also Convenient and oh yes, also very cheap.
Again, as someone working in finance (although not consumer) in emerging markets, I see up close that the whinging on is self-contradictory. More prudence, better standards, better risk controls, etc. means ipso facto reductions in credit lines, especially unsecured credit. Whinging on for self contradictory goals... why not ask for Tax Cuts & Spending Increases as well to achieve a balanced budget.
I do not use my AmEx Card for anything that I cannot pay off that same billing cycle, but I canceled my account when I saw this story on the news. I haven't had my credit limit lowered, but I suggest others follow suit and cancel their cards as well. What AmEx is doing is ridiculous and they need to be punished where they live.
The blacklist from Amex is the key here Megan. How would you like it if subscriptions to The Atlantic paid with an American Express card were placed on "the watch list" of slow paying customers? What if your readers found out this is a non-approved site according to Amex?
I thought not. The point I am making is that we do not know who they think are the wrong customers for Amex. Don't be misguided; this is blacklisting.
I wonder if their top employees got bonuses this year...now THAT would make a good story, Megan! Perhaps you can look into that???
Amex is trying to accurately predict the likelihood that you default, not shape your spending habits.
Great. Then disclose it in advance so that I, as a consumer, can deal with said creditor accordingly.
There is no point in you defending the indefensible. At the very least, a consumer should have a sense of how his credit usage is going to impact his relationship with the creditor and with the credit world in general.
There is no sound reason to oppose disclosure, unless you take some joy from operating the equivalent of a financial speed trap. A reduction in credit limit is going to lower one's FICO score, so the damage is not limited to the relationship with AmEx.
It's shameful how some will defend corporations at all costs, no matter how absurd or baseless the conduct. This situation illustrates the risks of a deregulated environment, as unelected institutions make decisions that impact us without informing us in advance.
Sam,
That's exactly the answer I was looking for: "...But I paid on time." That's not judging me on the purchases I make, but on the payments I make afterward.
We all know that simply eating at Charlie Trotter's isn't going to result in a higher credit limit-- eating at Charlie's and then paying it off will. Why the asymmetry between the high cost and the low cost vendors?
RW,
"There is no sound reason to oppose disclosure"
How will their system work if they disclose the methods?
What if your readers found out this is a non-approved site according to Amex?
Given some of the fundamental flaws with Austrian economics and their misunderstandings of basic finance theory, that might be a wise idea.
Perhaps we should also link credit scores to library checkout and bookstore sales records. Anyone who checks out or buys a copy of Atlas Shrugged should lose at least 50 points off of his FICO score. Renew it or buy a used copy, and you should lose 100+ points for having poor taste in books and for being cheap.
One comment about the calls for transparancy:
Shopping at certain stores doesn't make you high-risk; rather, high-risk borrowers are more likely to shop at certain stores. If AMEX gave you a list of certain stores, and if you responded by not shopping at those stores, then your credit risk will not have changed in any way. AMEX does not benefit if you shop at Whole Foods instead of C-Town.
In order for AMEX to identify those who are high risk, they can't disclose the certain stores that indicate high risk. AMEX isn't punishing you for shopping at certain stores; they are punishing you for being a potential deadbeat.
Perhaps we should also link credit scores to library checkout and bookstore sales records.
If you've just bought anything by Carlton Sheets or his many imitators, chances are you're an idiot about 6 months from total disaster.
Hmmm, I think that works pretty well.
When did library records become the sanctum sanctorum of privacy anyway? It's probably been 20 years since I checked anything out of a library. I believe I may still owe $1.25 in fines.
I take your point, Rob.
That said, the very problem with these kind of analysis tools is that they are guaranteed to generate false positives. Worse, the more sophisticate the system is (i.e., the larger the scope of the correlations it's searching for) the more false positives it will throw out.
What's worse, I've done enough professional work with expert systems to know that the people who design and use the systems tend to put a whole lot more confidence into their results than is actually justified by the data. One only need to look at Amazon's "Recommended for You" list to see how hilariously off these sorts of engines can be.
The problem for me, as a consumer, is that I can be penalized when such a system throws a spurious red-flag but because the system is proprietary there's absolutely no way for me to challenge the result or, in most cases, to even understand what behavior caused the flag to be thrown in the first place.
I can, of course, opt out and, believe me, as an Amex card holder in good standing, I'm thinking of doing just that.
I respect their desire to manage their risk but at the point where risk management becomes indistinguishable from arbitrarily jerking me around, I have to think that maybe I should take my business elsewhere.
RW,
Question - I am willing to bet that if you ran a search and found all the people who are taking out $200 in cash on a Friday night and then going out to bars, where they put drinks on their card, upwards of 80% of those people have a drug problem.
I know that would have tipped off Amex to my little problem that eventually made it hard to pay - before I sobered up of course.
Would it be wrong for them to use that algorithm?
Again, based on a direct knowledge of similar systems not in the US, I would strongly presume that the issue is not WHAT or WHICH stores are shopped at, but rather a sharp break in spending or shopping habits, that through data analysis of past behavioural trends, indicate to AMEX that there is a sign of emerging financial distress.
Thus, presuming AMEX is using the type of analysis I am familiar with, if a person not normally given to shopping down market across the board (perhaps with combined higher balance carry), suddenly starts, that is either a Fraud Flag or a sign of emerging financial distress.
Insofar as the said process is dynamic, the only thing an issuer could possibly reveal is that sudden breaks in a consumer's spending habits are likely to red flag you.
Of course, it is much more emotionally satisfying to decry anything at all that financial providers do, rather than simply carry on life.
How will their system work if they disclose the methods?
How about a nice note along with your statement that explains how downgrading one's spending habits could negative impact one's credit score, even for those who pay the bill on time?
Come on, folks, this isn't so difficult. If the rules are going to be changed, assuming those changes are reasonable, then at let the little guy who is playing the game know that they have. Changing the rules AND not disclosing the changes is as lopsided and arbitrary as it gets.
RW - I don't intend this as a defense of the practice, but:
informing the consumer in advance that shopping at Walmart will hurt his credit score defeats the purpose. If shopping at Walmart indicates that a person is a bad credit risk, it does so whether or not that person uses their AMEX card. AMEX wants to know whether their customers have spending habits similar to past defaults. They don't care whether you use your AMEX card for those spending habits, they want to know what the spending habits are.
Similarly, not allowing AMEX to be used at Walmart (as someone else mentioned) would deprive them of what they consider to be a valuable piece of information.
There are very good reasons that companies who score credit don't make their methods explicit - they would be ineffective if they did.
RW,
If AMEX says, "Ok my little coke fiends - if I see you taking out $200 in cash and buying drinks on the same night I'm going know you're bumping rails in the bathroom."
Well, in that case, I'm going to get my cash advances from another card, or use my ATM card for drinks.
If them tell me the system, I'll game it and it won't work.
One only need to look at Amazon's "Recommended for You" list to see how hilariously off these sorts of engines can be.
Yes, and if I had a Tivo, it would probably think I was gay. As it is, I have a Crapcast DVR, which doesn't appear to have any opinions about me.
On the other hand Midway USA and Cabela's seem to do OK in picking things for me.
I respect their desire to manage their risk but at the point where risk management becomes indistinguishable from arbitrarily jerking me around, I have to think that maybe I should take my business elsewhere.
Oh, absolutely. I'm not saying this is a wise business model, but the solution for consumers isn't to complain about privacy or transparency, it's to walk away.
Personally, I got my Amex from discounter Costco, so I doubt they'll be dinging me for taking advantage of everyday low prices anytime soon.
Similarly, not allowing AMEX to be used at Walmart (as someone else mentioned) would deprive them of what they consider to be a valuable piece of information.
That's a nice summary of the ongoing rationalization of the unbridled transfer of power into the hands of unrestrained corporations. That has already caused enough problems as is.
It's this belief system that illustrates the need to dial in more regulations into the financial system. If a consumer can't consciously manage his credit score without a creditor pulling the rug out from under him, then the consumer is just a pawn, not a citizen.
Come on, folks, this isn't so difficult.
No, it isn't. They can't tell you the system because then it won't work anymore. Not difficult to understand at all.
If a consumer can't consciously manage his credit score without a creditor pulling the rug out from under him
If you're "consciously managing" your credit score, you're making it less valuable as an indicator of your creditworthiness because it is reflecting your "management" (a.k.a. "manipulation", which is what you would call it if it were Amex "managing" their Moody's rating).
Do you not see that?
As consumers, we should know the strings attached and be given the opportunity to manage our behavior accordingly.
That's exactly why they don't tell you. If people can game their system, its less reliable.
Now, what Amex is doing is bad from a customer relations standpoint, and I'd bet the damage to customer relations is worse than the gain in reduced default risk. But since I'm not an Amex stockholder, I don't care.
I haven't had any problems with my own card and if I do I'll start using another credit card. Simple.
RW,
""consciously managing" your credit score," isn't that like Enron "consciously managing" its earnings? They knew what numbers to report so they tricked investors into giving them more credit than they deserved.
If it's wrong it's wrong.
They can't tell you the system because then it won't work anymore.
Right. It won't work...for AmEx.
Because a free market democracy is supposed to serve the corporations, not the needs of the little guy. We couldn't possibly want a system in which the lowly consumer has a chance to win, right?
""consciously managing" your credit score," isn't that like Enron "consciously managing" its earnings?
You've got to be kidding, right? Maybe websites like the one in this link should be banned: http://financialplan.about.com/od/creditdebtmanagement/a/improvecredit.htm
We couldn't possibly want consumers knowing how their creditors evaluate them. It's much better to keep things one-sided, defended by classified computer algorithms and safe in the hands of $10/hr "customer service" operators.
The irony in here is so thick...
The "problem": AX is allegedly going to reduce the amount of credit available to a customer (via lowered credit limit) based on a generalized pattern of behaviour by the customer regardless of that customer's individual history of direct business interactions with AX. This is evil, evil, evil, and only a greedy faceless corporation would do such thing!
The "solution": Commenters here are allegedly going to reduce the amount of credit they ask for from AX (via cancelled accounts or card non-usage) based on a generalized pattern of behaviour by AX regardless of AX's history of direct business interactions with that specific commenter. This is good, good, good, and is the best way for pure-hearted individuals to fight back against the machine!
RW,
Here's where I see the fault in your logic - lets say that AmEx must disclose every change in their model. That requires a detailed output of their model at a given time be disclosed as well as updates.
Lets say this translates to a large, very fine print document when you get your card and randomly (daily, weekly) letters updating the coefficient and weighting and new features. We already get basically this with their privacy policy and NO ONE READS IT! Doubling the disclosure requirements will have no real effect on behaviour.
RW, you're barreling off into strawman territory. Nobody wants to ban anything. It's just ridiculous of you to expect that a proprietary model which is developed at great expense should then be destroyed by disclosure.
If anyone wants to ban something, it's you, wanting to ban methods of credit evaluation of which you disapprove.
We couldn't possibly want a system in which the lowly consumer has a chance to win, right?
I would have thought that access to unsecured credit counted as a "win," but hey, what do I know?
"Oh, absolutely. I'm not saying this is a wise business model, but the solution for consumers isn't to complain about privacy or transparency, it's to walk away."
I don't think that those are mutually exclusive.
I think that it is very much in our interest, as consumers, to complain when those whom we do business with are behaving in a way that we object to. I would go so far as to say that the ability to do so is one of the foundation-stones of a free market.
It is not unreasonable for Amex to want to use every tool at its disposal to manage its risk. I have no doubt that if Amex were allowed to, they'd be thrilled to have access to my performance reviews and my medical records.
It is likewise, not unreasonable for me to want Amex to give me more information than they would like to give. It is in my own interest to get as many advantages out of my relationship with them as the converse.
Between the corporation and the consumer, there is a natural tension that needs to be negotiated and there is no solution to that negotiation that is objectively "correct".
The question is not what processes Amex would like to use to manage its risk, the question is what it's customer base is willing to tolerate, and the first sign that they're going to far is outcry from their consumer base, which is why their PR department is taking pains to spin this.
Although I'm sure they'd prefer it is there was no hubbub at all, I think that Amex would much rather have people complain about practices that they find disagreeable, first, rather than just having people summarily dump them.
Another thought: if Amex's model is good a predicting defaults, and RW is mad that consumers can't game Amex's system in their favor, when what he considers "winning" is apparently getting credit for which one is a bad default risk.
This does not strike me as a sound basis on which to build an economy, but perhaps we will have to wait for empirical confirmation of my intuition.
Andrew: I find nothing to disagree with in your last post.
RW
As you get into debt, borrowing from an entity like AmEx, you do give up more and more autonomy. Indeed, you are a pawn. Instead of trying to manage your credit score to maximize your available consumer credit, you might want to consider getting out of debt and out of consumer debt servitude. Then, of course, those AmEx bastards have no power over you, and you are a free citizen.
what he considers "winning" is apparently getting credit for which one is a bad default risk.
I must have missed the part where someone here was able to prove that shopping at a given merchant was tied to credit risk.
I wonder if the guy who wrote that algorithm was the same one who believed that home mortgages with no equity could support AAA ratings?
In any case, I would be inclined to think that the right-wing political rationalizations provided here miss the likely true motives of the company.
The underlying agenda is more likely a function of niche marketing. AmEx takes a rifle rather than shotgun approach, targeting a more affluent demographic that will generate fewer transactions with larger fees.
AmEx positions itself as being the BMW and Bentley of cards. It doesn't particularly want Hyundai shoppers cluttering its roster with nickle-and-dime charges that produce it only nominal profit.
I don't particularly have a problem with that business model. But damaging the credit score of a consumer who has complied with the cardholder agreement is akin to theft. Each of us has a score -- actually, three of them -- and we have a right to manage those scores in ways that serve our interests.
It's akin to theft for AX to take actions which also comply with the cardholder agreement?
Hahahahahaha.
I must have missed the part where someone here was able to prove that shopping at a given merchant was tied to credit risk.
Nobody has and nobody can. Which is the function of the word "assuming" in my post; Amex thinks it has, and they certainly know better than I (or you) do, even though it later comes out they're wrong.
AmEx positions itself as being the BMW and Bentley of cards. It doesn't particularly want Hyundai shoppers cluttering its roster with nickle-and-dime charges that produce it only nominal profit.
My Amex says "Costco" on the back of it. When my family buys Bentleys, we do it in six-packs.
Seriously, do you really think your evidence-free fantasy is more plausible than a model which takes changes in spending patterns into account? Really?
But damaging the credit score of a consumer who has complied with the cardholder agreement is akin to theft.
FICO rests on a proprietary algorithm, too, you know. Three of them, actually. We have a general idea of how it works, but it's not like Equifax will send you a copy of their methods if you ask for it.
RW,
I think you have a very valid point. If someone had a $10,000 credit limit and had only $800 on the card, that would look great as the % of credit utilzied would be very low. However, if the system flagged something in error and they dropped your credit limit to 1,000 and your credit utilzation went to 80%, your FICO score would drop.
If this meant that the rate on your car or home would rise, I might have issues with it.
Wasn’t there another post Megan did a few weeks ago from a NYT article about a real estate developer who claims that even though he made every payment on time, the bank called in his loan? I seem to recall a number of readers who claimed to be knowledgeable about that particular kind of lending making some rather salient points that (a) there was more to the story than was reported and (b) based on the facts that were given, they were reasonably sure why the bank did what it did and (c) that it was actually a lot more reasonable than was initially reported.
I work in the legal field (health law) and I can’t say that I’m particularly impressed with the way that reporters generally cover complicated issues related to health care and the law. They often make mistakes that people knowledgeable in the field can quickly recognize but may not be as obvious to a layperson who takes what they read at face value. It seems as if the reporter has pre-constructed a narrative – usually how a hapless consumer is being cheated by an evil powerful company – and the facts are reported in a way that supports that narrative.
I suspect that many of these personal finance stories have similar problems in their reporting just as the story we discussed about the real estate developer appears to have. In which case, I refuse to take Kevin Drum’s third-hand account at face value. Show me the letter and the other facts that didn’t fit the NYT reporter’s narrative.
RW:
Who said anything about damaging a credit score? The single vendor (Amex) lowered the amount of credit they would extend to the borrower. It shouldn't affect FICO scores as it's not an adverse event on your credit line.
It could affect it if it changes your owed/max ratio, but thats all part of the game.
After reading Kevin Drum's list of merchants, it's not at all clear that the problem vendor was WalMart. For all I know, it was the honeymoon travel or the restaurant charges, or some other pattern not clear from a mere listing of merchants.
It seems that a lot of people here don't know what data mining is.
AMEX looks at a particular outcome (default), throws a slew of variables into a program (SAS, Clementine, etc.) and this program finds which variables correlate with the behavior. They have some information that they can use (shopping history, credit history), some that they can't (race, gender), and some information they don't have (books read, favorite channels on TV, etc.).
AMEX isn't going through the data saying "I wonder what a recently laid-off banker's spending patterns look like", they are looking at variables that show a strong(er) correlation with defaults. That's ALL they are looking at.
If there is a sensible explanation for this (shopping at 'low-cost' retailers means a loss of income), all is well and good. If it doesn't (purchases of paper plates?), they ignore it. But the fact of the matter is, this came to their attetion because they had a variable correlate with defaults. They would not act on it for any other reason.
FWIW, I do not have an AMEX card.
The single vendor (Amex) lowered the amount of credit they would extend to the borrower. It shouldn't affect FICO scores as it's not an adverse event on your credit line.
A reduction in credit limit would be reported and absolutely would negatively affect one's credit score. A reduction in credit line is viewed as a negative, not as a neutral event.
If this meant that the rate on your car or home would rise, I might have issues with it.
That's the heart of the problem. In addition, there is also the related issue of whether AmEx uses WalMart shopping as an excuse to lower the limit to such a point that it puts the account into default.
Oddly enough, AmEx's own declining performance suggests that it isn't exactly a model citizen in managing its own affairs. Firms such as these might be a bit too motivated to justify fees and surcharges in order to bolster their own sinking incomes. Membership has its privileges....
Seriously, do you really think your evidence-free fantasy is more plausible than a model which takes changes in spending patterns into account?
Apparently, you aren't familiar with AmEx's business model. It charges higher merchant fees and issues fewer cards than Visa or Mastercard, and unlike Visa and MC, it doesn't franchise its brand and network to banks.
AmEx is clearly more about margin and niche marketing than a pure mass market volume play. The Costco tie in is obvious -- it wants access to small business owners and entrepreneurs. I doubt that you'll be seeing a Big Lots AmEx card anytime soon, although if we follow your logic, they should offer one so that they may build a blacklist par excellence.
Apparently, you aren't familiar with AmEx's business model.
I'm not arguing about their business model, I'm arguing that the idea that they would deliberately torture people who aren't as "upmarket" as they'd like to get rid of them is ridiculous. They do it because they think they understand default risk, not because they're worried about laid-off bankers tarnishing their images by appearing in public wearing (shudder) Dockers.
Overall, credit card contracts are roughly "We give you unsecured credit, and in exchange reserve the right to treat you like crap." Nobody's forcing anyone to get or use a card if they don't like those terms. You can always call them and yell at them to get your credit limit fixed anyway.
"Who said anything about damaging a credit score? The single vendor (Amex) lowered the amount of credit they would extend to the borrower. It shouldn't affect FICO scores as it's not an adverse event on your credit line.
It could affect it if it changes your owed/max ratio, but thats all part of the game."
You do realize your last line directly contradicts the one before it, right? Unless you're not carrying a balance, lowering one's credit limit inherently affects one's percentage of available credit used, and that (not inherently, but fairly likely since it's a decent-sized component) will lower your FICO score. So, if you do think it's just "part of the game" for AmEx to arbitrarily take actions that can lower your score and directly cost you money on your next car/house even if you've never missed a payment, so be it. But at least take that position.
"If you're "consciously managing" your credit score, you're making it less valuable as an indicator of your creditworthiness because it is reflecting your "management" (a.k.a. "manipulation", which is what you would call it if it were Amex "managing" their Moody's rating)."
Rob Lyman,
If the indicators are as reliable and objective as they are claimed to be, wouldn't they be impervious to manipulation?
If Moody's requirements criteria for assessing the risk of Amex's bonds and common stock were correctly designed, there would be no way for Amex to manipulate it. A company has sufficient cash flows to service its debt, or it doesn't. A company reliably pays interest or dividends, or its doesn't. A company has debt ratios over a certain %, or it doesn't. Likewise,if you are truly are a bad credit risk, how can you possibly fake being a good credit risk? If you are a bad credit risk, you will not make your payments on time, you will hold large dollar balances for extended periods of time relative to your income, you will run up balances on your other credit cards that are over 50% of the available credit, etc. You either engage in these risky and/or unreliable behaviors or you don't. You really can't fake responsible and reliable behavior in your use of credit. Therefore, Amex or has been manipulated or gamed by a deadbeat, it's because they have failed to perform due dilligence in assessing the credit risk of that deadbeat, not because they failed to keep some wecrets.
If you know that you must never be late with a payment (even by a day), that you should pay down your balances within the grace period on a consistent basis over the course of a year, and that you should keep your total debt under 10% of your net income over the course of the last six months, and you adhere faithfully to these behaviors in order to maintain or even improve your credit, you are not guilty of gaming the system. You are complying witht the system's rules. As long as you comply with those rules, then you are objectively a good credit risk.
I'm not arguing about their business model, I'm arguing that the idea that they would deliberately torture people who aren't as "upmarket" as they'd like to get rid of them is ridiculous.
The first sentence contradicts the second. AmEx has always positioned itself as having some degree of exclusivity. Presumably, the higher end demographic generates more fees and supports the brand message.
Higher end positioning involves keeping the card out of the hands of the lower echelon. Branding is about defining a product's focus, which includes communicating of what it isn't.
I don't know AmEx's numbers, but your typical bank needs those cardholders who don't carry balances to charge a few thousand dollars per year just to break even. I would imagine that the number would be higher for AmEx.
If I was AmEx, I wouldn't want the lower end, either. It's hard to justify the pricing and branding of a Black Card, for example, if anyone and his brother can get his hands on some sort of AmEx card product. AmEx is wise to leave the lower end of that market to Visa and MC because if it tries to compete with those two head-on, it is going to lose.
It should also be added that this is somebody else's money. No one has a right to it.
...90-95% of people who declare bankruptcy are below the median income for their area.
Can you cite the source for this and what does this have to do with red tagging Wal-Mart shoppers?
If the indicators are as reliable and objective as they are claimed to be, wouldn't they be impervious to manipulation?
Of course not. Look, suppose a shift to shopping at WalMart really is a good indicator of an upcoming default. If you know the credit card companies think that way, you'll just pay cash at WalMart, thereby depriving them of a valuable piece of information about your creditworthiness.
RW, two points:
1) If Amex doesn't like people shopping at WalMart, they shouldn't do business with WalMart, and
2) if Amex considers a particular customer too "downmarket," they could cancel his card.
I don't dispute that they have a brand image to maintain, I dispute that this credit-limit downgrade was part of their branding efforts.
If the indicators are as reliable and objective as they are claimed to be, wouldn't they be impervious to manipulation?
This is rather Quixotic, but the obvious answer is that no behavioural indicator, however reliable, is 'impervious' to manipulation., once it becomes the conscious object of managed behaviour.
Really rather simple, actually, basic issue in behavioural sciences....
In any case, this is certainly a lesson in the willful ignorance of masses; certainly an excellent lesson that as a lender one should never give a peak behind the skirts, as the irrational and hysteric reaction will be unbounded.
Um... Megan, you seem to be making the logical leap that anyone who shops at Wal-Mart must, ipso facto, be facing bankruptcy.
And if this policy is so brilliant, why is Amex covering it up? Let it shine!
"This is rather Quixotic, but the obvious answer is that no behavioural indicator, however reliable, is 'impervious' to manipulation., once it becomes the conscious object of managed behaviour."
How can one manipulate such indicators as timely payments over the last 12 months, keeping credit balances less than 50% of the available credit limit for a period of 6 months, and keeping the absolute dollar amount of your debt below a required threshold, such as no more than 10% of your income? You either do these things, or you don't. There is no manipulation that can occur here, so long as the person perfomring the assessment does due dilligence. If the assesor actually verifies that a person made their payments on time during the period February 1, 2008 to January 31, 2009 by looking at the payment history for each month, no amount of manipulation will enable that person to disguise a late payment during that period from the assesor.
Moreover, the behavior associated with the good use of credit by a borrower is managed behavior, and this behavior has the conscious object of building a good reputation for the borrower in the eyes of the lenders. I don't see how knowing all the rules required to maintain a good reputation with lenders enables one to manipulate lenders, so long as the criteria used by lenders are reliable ones, and the lenders engage in the proper dilligence to ensure that the borrower is faithfully adhering to the substance of the rules.
The difference between assessing risk by the known criteria of income, payment history, and FICO scores, and the new "blacklisting" scheme developed by AmEx is disclosure. You have the right to know, in advance, what the terms are when you enter an agreement with a lender. It may be "their money", but you are paying interest and fees for the right to use it. You are a customer, and nothing else, so long as your meet your obligations under the agreement. Some people may be willing to enter agreements with AmEx knowing that they'll behave this way, but they should have to tell you so upfront.
"Of course not. Look, suppose a shift to shopping at WalMart really is a good indicator of an upcoming default. If you know the credit card companies think that way, you'll just pay cash at WalMart, thereby depriving them of a valuable piece of information about your creditworthiness."
Rob Lyman,
On the other hand, if you use cash to pay for your purchases at Wal-Mart because using your credit card will lower your limit, even though you have maintained a good payment history, you won't be using your credit as much as you did before. Therefore, your credit card balance will more likely remain at a managable level for your reduced level of disposable income (which presumbly is why you shifted your shopping habits to Wal-Mart).
In this case, the borrower is not getting away with manipulating the system, and getting something over the lender. Knowing the rules in fact promotes a change to more responsible use of credit on the part of the borrower, which in turn lowers the borrower's risk of default.
Disclosure only allows manipulation when the rules lack logical consistency. If running up my credit balance at Wal-Mart raises a red flag, then so should running up my balance at Target or JC Penney or Macy's. If I need to use cash at Wal-Mart to maintain a certain credit limit, I should also need to use cash at those other places.
On the other hand, if you use cash to pay for your purchases at Wal-Mart because using your credit card will lower your limit, even though you have maintained a good payment history, you won't be using your credit as much as you did before.
Why not? You could potentially shift away from cash and towards credit at non-blacklisted stores, thus maintaining a neutral credit/cash position, while avoiding the blacklist. Or you could decide not to shop at WalMart at all and pay higher prices elsewhere instead, thus maintaining a higher credit limit while actually being fiscally less responsible.
Even your on-time payment scenario is subject to manipulation. If you know Amex will freak out if you're one day late, but your local bar tab can be kept open through abject begging or sexual favors, then you'll stiff the bar and pay Amex, thus making yourself look more responsible than you really are and possibly setting Amex up for a nasty surprise.
Unless the behavioral indicators are perfectly matched to creditworthiness, there is room for manipulation. And as it turns out, there's no such thing as a perfect match.
I'm not, mind you, arguing that Amex's decision is definitely wise or rational, merely that, if it is sound empirically, it will only remain so as long as it is secret or at least pretty vague.
Rob Lyman,
In addition, the whole point for lowering my credit limit when I start making regular credit card purchases at Wal-Mart is to lower my use of credit when my disposable income has gone down, and make me purchase things for cash only. Therfore, if I make cash purchases only at Wal-Mart in order to maitain a certain credit limit, I have adopted the very behavior that the credit card company wants me to engage in. How has disclosure then allowed me to manipulate the system, when I have adopted the very behavior that makes me less of a credit risk?
Many commenters are missing a crucial fact about AmEx. The AmEx green card has no credit limit. It's not a credit card. You can charge and charge to it as much as they will let you. And you have pay it all off by the due date on the bill.
When I first got one, I used it for business travel and had that fact verified to AmEx by my employer. I had $4000/month AmEx bills when I had a gross salary of $1000/month. (Oh and boy did I get bombarded by junk mail for luxury goods. I also was offered a Platinum Card when they first came out. Still have a green card.)
I went and read the original article chain (NYT->AJC) and his website and spotted a key factor that may have led to his limit getting cut. (I'm assuming he had one of the cards that have credit limits, like an Optima.) He had just returned from a honeymoon. His SO may have a bunch of student loans or other debt and have a rotten credit score, which will spill over onto his. Nobody seems to have asked him.
Obviously AmEx is not blacklisting everyone who EVER shops at Wal-Mart.
What they might be doing is spotting a shift in shopping habits. You used to shop at Target and The Gap; now, despite still living in the same place, you've stopped doing that and are shopping at bargain stores. Ok, yes, you COULD just be being frugal in anticipation of the nation's looming economic troubles, but most people who suddenly cut back on their spending do so because they're in trouble financially. AmEx can't come to your house and comb through all your personal finances to see if you're in the former group or the latter; it has to play the odds. And odds are, if you suddenly switched to bargain shopping, you're in significant financial trouble.
I use my credit cards pretty predictably -- gas at one of three gas stations, groceries from one of three grocery stores, clothes from one of two stores, most everything else from Amazon. Every so often I do a number of unusual things in a row, and when I do I often get a call from Fraud Detection asking if it was really me doing that stuff. I tell them yes and they leave me be.
This is the same sort of thing, except they're trying to detect potential deadbeats instead of fraud victims. Obviously they can't just call you up and say "so, are you planning to not pay your bills" -- so they have to guess.
In addition, the whole point for lowering my credit limit when I start making regular credit card purchases at Wal-Mart is to lower my use of credit when my disposable income has gone down, and make me purchase things for cash only.
No, the point is to limit Amex's downside exposure. They don't care how you spend your money, as long as you pay them.
Therfore, if I make cash purchases only at Wal-Mart in order to maitain a certain credit limit, I have adopted the very behavior that the credit card company wants me to engage in.
The behavior they want you to engage it is to pay your bill. They do not care about anything else. And I'll point it out again: if you shift your cash from other stores to WalMart, you haven't (necessarily) changed your aggregate use of credit, and indeed you might be making worse financial choices that make you more of a credit risk, but thanks to your knowledge of the system, you have successfully hidden it from the issuer.
"Even your on-time payment scenario is subject to manipulation. If you know Amex will freak out if you're one day late, but your local bar tab can be kept open through abject begging or sexual favors, then you'll stiff the bar and pay Amex, thus making yourself look more responsible than you really are and possibly setting Amex up for a nasty surprise."
Rob,
There is a logical inconsistency here. If you don't have the ability to pay a bar tab, how likely is it that you have enough disposable income to pay on your Amex card? The more likely scenario is that Norm Peterson or Homer Simpson would pay his tab to Sam or Moe using his Amex card, and then fall behind on his Amex Card, especially when one considers the baseball bat factor. Defaulting on your Amex Card ruins your credit, and results in being sent to collections and/or to court. Stiffing your local bar owner (who knows where you live and where you hang out) can result in busted kneecaps.
More than likely, however, the local bar owner is not going to let Norm or Homer get away with such crap in the 1st place. They are just as likely to report Norm or Homer to the credit bureau as Amex is. That pretty much limits the ability of sitcom characters like Norm and Moe to get away with manipulation in the real world.
In addition, in the real world a guy who can't pay his bar tab is also going to be a guy who doesn't pay his other debts (mortgage, utility bills, and credit cards) on time. Furthermore, a guy who can't pay his bar tab is going to be a guy with large credit balances relative to his income, and going to have balances greater than 50% of his credit limits. Therefore, even the on-time payment schedule can't really be manipulated, since it is an indicator considered in concert with others.
A more likely example of attempted manipulation would be to pay off your credit cards on time, while making late payments on the furniture that you got thru store credit. Even that sort of manipulation won't work, however, since the furniture store will report your late payment to the credit bureau, no matter how much begging you engage in.
Please stop writing.
Your lack of economic knowledge makes my brain hurt.
But Dan, the very fact that their fraud unit calls you even though your card hasn't been stolen should make you worried, as a consumer, about them using similar methods to decide whether or not you are a credit risk.
They called you because their system had a false positive. Any system that depends on correlating variables to behavior is prone to generating false positives. That's just the nature of the beast.
In the case of potential identity theft, the false positives aren't a problem. They call you, ask you to verify that no one stole your card, and everyone goes on their way and you feel good because they're watching out for you, so to speak.
But when they use that same methodology to flag you as a risk, there is no confirmation. They simply adjust your account based on the correlation, whether it's a false positive or not. A false positive in this case hurts you and there isn't much you can do to correct it precisely because the system is a black box.
I've had enough experience with these sorts of systems, from the inside, to have a deep distrust of them, not least because people have a very bad habit of treating the output of these systems as though they were dealing with objective data when, in fact, the data is generally riddled with error.
If your credit agency is using such a tool to decide whether or not you are a risk, you should be concerned about that and you should give serious thought to switching to another agency.
I know I am.
Firstly, Wal Mart is almost certainly not one of the vendors on this so-called list. That was just an assumption that Kevin made that everyone jumped on.
But lets see if I get this
If you do provide credit to people who may run into trouble repaying, you're evil because you're trying to force people into debt.
If you reduce credit for such people (and I doubt very much that anyone with a good credit record would have any trouble with this criterion), then you're evil because you don't give people credit.
Personally, I love CC companies. No fees, I pay by bills in full (and yes, I shop at Wal Mart all the time) and enjoy all their rewards. Credit card companies are milch cows. Amex is actually one of the stingier in that it doesn't give out as many freebies as some other issuers.
There is a logical inconsistency here. If you don't have the ability to pay a bar tab, how likely is it that you have enough disposable income to pay on your Amex card?
There is no logical inconsistency at all, although there may be practical reasons why it is a poor example. My point was merely that knowing who among your creditors is most likely to report you to the credit bureau allows you to manipulate your score by paying the twitchy ones first.
If you don't like the bar tab, imagine you talked a coworker into giving you a loan, or you owe money to your weekly poker game, or that you've decided to sell off your personal possessions on Craigslist. These are all bad indications which Amex will likely never learn about precisely because you know they're twitchy about late payment.
It is always possible to alter one's behavior in response to a perceived punishment or reward.
"And I'll point it out again: if you shift your cash from other stores to WalMart, you haven't (necessarily) changed your aggregate use of credit, and indeed you might be making worse financial choices that make you more of a credit risk, but thanks to your knowledge of the system, you have successfully hidden it from the issuer."
And I point our again that if running up a credit card balance at WalMart is a red flag, then running it up at other stores should also be a red flag. However, if the issuer's rules are logical and reliable and supported by good data, I should not be able to get away with such manipulation. If I run up my credit limit regardless of store, that should be a red flag. Simple logic and common sense indicates then that rules that only work in the absence of their disclosure have a reliability that is suspect at best.
If I run up my credit limit regardless of store, that should be a red flag.
I don't know if you've noticed or not, but this entire thread has be predicated on the (possibly incorrect) belief that purchases at WalMart are a red flag, while purchases at other retailers are not. You can deride the rule as stupid, but supposing for the moment that it really does work pretty well (and to know that, we'd need to see Amex's proprietary data), would you agree that disclosing it destroys its usefulness?
Simple logic and common sense indicates then that rules that only work in the absence of their disclosure have a reliability that is suspect at best.
Not necessarily. Clearly rules that are subject to easy manipulation are rules which have no inherent connection to the targeted behavior. That does not mean, however, that they don't have a substantial connection in real life.
With all due respect, Jon, I haven't seen anyone in this discussion who is arguing that credit companies shouldn't restrict the credit of those who can't make their payments.
Introducing straw men into the debate doesn't help the signal to noise ratio.
". Simple logic and common sense indicates then that rules that only work in the absence of their disclosure have a reliability that is suspect at best."
Would you also urge the IRS to reveal the exact rule that is used to trigger an audit ?
"I don't know if you've noticed or not, but this entire thread has be predicated on the (possibly incorrect) belief that purchases at WalMart are a red flag, while purchases at other retailers are not. You can deride the rule as stupid, but supposing for the moment that it really does work pretty well (and to know that, we'd need to see Amex's proprietary data), would you agree that disclosing it destroys its usefulness?"
No,
Because if the logic and data behind the rule is sound and unimpeachable, it will work even when it is known. After all, Amex would be able to formulate a whole framework of other rules applying to other stores that use the same airtight logic and information. Therefore, even if I know that switching my credit card purchases to Wal-Mart decreases my credit limit, I will not be able to game the system by switching to Target or JC Penney ins, because the smart people at Amex would have formulated like-minded rules to cover those stores also.
If they had failed to do so, that means the folks at Amex are not as smart as you claim them to be, and it also means that we should not be so eager to pay deference to their arguments.
Oy, more irony! Andrew, you've introduced a strawman here while admonishing Jon to not introduce strawmen.
Jon did not say that anyone in this discussion is arguing that credit companies shouldn't restrict the credit of those who can't make their payments (your phrase).
He pointed out, correctly, that some people here are getting torqued because AX is apparently using some algorithm to help them identify cardholders who may run into trouble repaying (Jon's phrase) and are thus limiting their exposure by reducing the available credit.
"With all due respect, Jon, I haven't seen anyone in this discussion who is arguing that credit companies shouldn't restrict the credit of those who can't make their payments."
Thats exactly what you're arguing implicitly -- you're saying that Amex should not use rules (assuming the rules are working reasonably well) to reduce its risk (its THEIR money that is largely at risk, remember that). The decision to extend credit is discretionary. I
And if Amex's rules are flawed, then surely some other issues would accomodate you ?
"No, the point is to limit Amex's downside exposure. They don't care how you spend your money, as long as you pay them."
Rob,
They do care how you spend your money in relation to your credit, because it has a direct correlation to your ability to pay them. If you maintain high balances in relative and absolute terms, if your debt is higher than a certain threshold (say, 10% of your income), if you use your credit to mainly buy short-term items groceries and fast food meals and don't pay off these expense within 30 days, et cetera, your chances of making your minimum payments on time are decrease immensely.
Morever, if they didn't care how you spent your money, then switching to WalMart wouldn't matter. So no, they do care a lot about how you spend your money in relation to your credit.
"Because if the logic and data behind the rule is sound and unimpeachable, it will work even when it is known. After all, Amex would be able to formulate a whole framework of other rules applying to other stores that use the same airtight logic and information. Therefore, even if I know that switching my credit card purchases to Wal-Mart decreases my credit limit, I will not be able to game the system by switching to Target or JC Penney ins, because the smart people at Amex would have formulated like-minded rules to cover those stores also."
I doubt Wal Mart is in this so-called list, for the excellent reason that it has too much clout.
In any case, you're calling for all rules to be revealed. So by your own logic, JCP and TGT rules would have to be revealed also.
Why not ask Amex to disclose all its rules used to identify possibly fraudulent charges ? Surely, the same reasoning applies there also.
eltoro,
Why are you basing your argument on the hypothetical existence of Platonic credit scoring rules? I agree that perfect rules would defy manipulation. But--and this is important--no such thing exists. All the rules currently in use are imperfectly correlated to an unmeasurable quantity (risk of default). It is precisely because of the imperfect correlations, unavoidable in the real world, that the rules need to be secret to avoid manipulation.
I make no claims about Amex other than that they manifestly know more about credit scoring than I do (and in all probability, more than you do). They do not claim to be perfect, nor do I imagine them to be.
But Dan, the very fact that their fraud unit calls you even though your card hasn't been stolen should make you worried, as a consumer, about them using similar methods to decide whether or not you are a credit risk.
There is no reason for me to be concerned. The absolute worst-case scenario would be if ALL credit-card companies had incorrectly identified me as a credit risk. In this scenario all of those companies lose money -- the profits they would have generated off my purchases. The only downside to me is that I'd have to get a secured card. The reality is that even that wouldn't happen. I might get falsely canceled by one card and end up having to switch to another, but, again -- their loss.
If your credit agency is using such a tool to decide whether or not you are a risk
It does. So does yours. So does every credit card company ever. Yet I'm mysteriously able to get a credit card; see above, re: me not being worried.
"Would you also urge the IRS to reveal the exact rule that is used to trigger an audit ? "
Yes I would. In fact, the government is under an even greater obligation than private enterprise to disclose its rules, particularly the rules it uses when deciding to subject a citizen to an intrusive action like an audit. I'm pretty sure Megan and her libertarian ilk would agree that it is a constitutional and moral imperative for government to be completely transparent about its reasons for putting the weight of government on the citizens that it is supposed to serve.
If I know what situations could trigger an audit of my finances, I will be proactive and make sure that I have all documentation that I need to prove that I have fully complied with both the substane and form of our tax laws. This would result in me being even more compliant with our tax laws than I am now. After all, ignorance of the law is no legal defense, but knowing the law and the regulations related to adminstering it enables one to take actions which go a long way toward protecting yourself from overzealous IRS agents. It is not 100% effective, but it's far better than being completely in the dark
If I know what situations could trigger an audit of my finances, I will be proactive
Yes, proactive in finding ways to cheat which are known not to trigger audits.
Perhaps the government should also be required to notify us where every speed trap is placed. You could have an exclusionary rule where tickets are waived if the notice was issued less than 24 hours before the ticket.
"In any case, you're calling for all rules to be revealed. So by your own logic, JCP and TGT rules would have to be revealed also.
Why not ask Amex to disclose all its rules used to identify possibly fraudulent charges ? Surely, the same reasoning applies there also."
Yes, all rules should be disclosed, even the ones used to identify fraudulent charges. The customer deserves to know all the rules that the customer is expected to follow, and what premptive steps the customer should take to prevent his credit card from being deactivated due to mistaken identifications of fraud.
You might argue that criminals would benefit from disclosures. However, that assumes that criminals don't know the rules already. This is unlikely, since identity thieves and/or credit card thieves tend to be habitual and serial offenders, and they learn from experience how long it takes for credit card companies to detect fraud, and what sorts of transactions are likely to trigger the fraud alarms.
On the contrary, Jon, I am explicitly stating that I am deeply skeptical that their rules do, in fact, accurately assess risk and I object, as a consumer, to the prospect that my credit rating could be potentially damaged by a false positive.
Unfortunately, because their system is a black box, I really don't have any way of knowing how much of a risk that is to me.
I have also been fairly clear that Amex can do whatever they like, within the limits of the law. I am not proposing nor suggesting that they should be restricted from using correlation algorithms. I do think, however, that it would be ethical of them to disclose this fact to their customers.
That said, I have every right, as a consumer, to take my business elsewhere if I think that my credit company is using a process that could damage my credit rating regardless of whether or not I am an actual risk to them.
You might argue that criminals would benefit from disclosures. However, that assumes that criminals don't know the rules already. This is unlikely...
So wait a minute, now you're arguing that revealing the rules would benefit clueless criminals, but it doesn't matter because real-life criminals already know anyway? Doesn't that mean you've just conceded that secrecy enhances the value of these sorts of behavioral rules, which you have been denying all along?
So, which is it?
"Yes, proactive in finding ways to cheat which are known not to trigger audits."
No,
Proactive in making sure that all my required documentation proving both the legitimacy and compliance of my finances is available, complete, and unassailable. Nothing makes the tax man leave faster then when he sees that you can fully substantiate your compliance with both the letter and substance of the tax law.
You might be a dirty tax cheat, Rob, but most of us citizens are not like you. We pay our taxes, and make a good faith effort to comply with the law. We have a right to expect our government not to automatically treat us as tax-dodging scumbags. We deserve the presumption of innocence and good faith, and we deserve full disclosure and transperancy from our government.
There is no reason for me to be concerned. The absolute worst-case scenario would be if ALL credit-card companies had incorrectly identified me as a credit risk. In this scenario all of those companies lose money -- the profits they would have generated off my purchases.
Or, more realistically, one card decides to lower your spending limit, which raises the credit utilization percentage, which gets reflected on my FICO, which results in you paying a higher APR, even if you switch to another card. And, of course, your credit score is used for much more than just securing a credit card.
Honestly, Dan, I'm glad that you feel so confident that you'll never fall prey to a bad false positive and even if you did, it's not especially likely that you're world will implode.
Never the less, the fact remains that these correlation models are error prone and I doubt that even the institutions who are using them really appreciate how prone to error they actually are. I think that I have every right, as a consumer, to be concerned by this.
Look at it this way. Let's assume a false positive rate of only 1% (and believe me, that's optimistic). Let's further assume that only 1% of those false positives fall into the serious category (which is, again, optimistic). That still means that for every million customers you've got, one hundred of those customers is getting screwed through absolutely no fault of their own and, worst of all, there's absolutely nothing that they can do about it.
"So wait a minute, now you're arguing that revealing the rules would benefit clueless criminals, but it doesn't matter because real-life criminals already know anyway?"
Rob,
I wrote, YOU might argue that revealing the rules would benefit clueless criminals. My argument is that criminals aren't clueless, and the lack of disclosure doesn't prevent them from figuring the rules out.
(Try to improve your reading comprehension skills.)
You might be a dirty tax cheat, Rob, but most of us citizens are not like you.
Nobody has ever accused me of aspiring to a Cabinet post before.
My argument is that criminals aren't clueless, and the lack of disclosure doesn't prevent them from figuring the rules out.
...which implies that knowing the rules has value to the criminals. Otherwise, they would not bother to figure them out. From which it follows that secrecy in the rules enhances the value of the rules by making manipulation harder. Which you have repeatedly said is not true.
In order to be consistent with your previous posts about how logical rules can be public, you would have to argue NOT that criminals know the rules already, but rather that this knowledge is not useful to criminals.
Are you arguing that a clueless criminal is in no better position to avoid capture than one who knows the anti-fraud rules?
Moreover, Rob, you are conveniently leaving out the fact that our argument has been about disclosures to CUSTOMERS, not disclosures to criminals. In adddition, the argument that you have given is that the logic and data used by Amex in formulating the WalMart rule is valid and sound, and that the lack disclosure is necessary to prevent manipulation or gaming.
However, if the logic and data used in the formulating the rules are sound and valid, then manipulaton and gaming should not work even with full disclosure. If the Amex was as smart as you claimed them to be, then Amex would have created a logical framework of rules applying not only to WalMart but also to Target, Penney's et cetera. This would block attempts by customers to manipulate the system, using simple, concise logic and common sense. No Platonian ideal of perfection is required here in formulating rules dealing with customer behavior.
No, if anybody is advocating Platonian philosophy, it is you. The Platonians were big advocates of keeping knowledge in secrecy and mysticism, and abhorred the idea of the masses having access to higher knowledge.
Moreover, Rob, you are conveniently leaving out the fact that our argument has been about disclosures to CUSTOMERS, not disclosures to criminals.
I do not see the distinction, logically speaking, between trying to prevent customers from concealing their propensity to default and preventing criminals from concealing their crimes. Both anti-fraud and anti-default rules are relying on imperfect rules and data mining to discover undesirable behavior. If secrecy aids in one of these enterprises, it will aid in the other as well.
However, if the logic and data used in the formulating the rules are sound and valid, then manipulaton and gaming should not work even with full disclosure.
The rules are (probably) not formulated by logical deduction, so notions of soundness and validity are inapposite. They are formulated by statistical induction--lots of people who did X also did Y, but few people who did not-X did Y. If X and Y are not inherently linked, then people prone to Y can choose to avoid X if necessary, but it happens that at the moment they are not doing so. Revealing the use of X will therefore destroy its predictive power because the correlation with Y will promptly disappear as Y-prone people avoid X to conceal their Y-ish tendencies.
And by the way, I do not assert that Amex has found a wonderful model for predicting default. I merely say that if they have, they need to keep it secret or it will cease to be a wonderful model.
"which implies that knowing the rules has value to the criminals. Otherwise, they would not bother to figure them out. From which it follows that secrecy in the rules enhances the value of the rules by making manipulation harder. Which you have repeatedly said is not true."
No,
I have argued that if the rules are really as logically sound and well-grounded in fact as you claim they are, then manipulation is not possible under disclosure. Rules work in concert with each other, and if the rules are truly based on sound reasoning, then it would not be possible to maintain a high credit limit by running up your tab at Target while paying cash at WalMart. The same sound reasoning that creates the WalMart rule would also prevent a loophole from occurring when shopping at Target. This does not require Platonian perfection, just thorough Socratic and Aristotelian reasoning. If the Amex guys are as smart as you claim they are, they should be able to aspire the standards those imperfect mortals set.
So if anybody is guilty of contrary argumentation, Rob, it is yourself. First you claim that Amex uses sound reasoning to forumlate its rules, but then you argue that the rules can be manipulated, and therefore must be kept secret. Rules, however, can only be manipulated if poor or inconsistent reasoning went into the formulating the system of rules in the 1st place. You have therefore argued that the rules are sound and that the rules are not sound.
eltoro,
Your argument relies on the rulebook not having loopholes which can be found and exploited. If it has no loopholes, then disclosure is perfectly fine. If it has some, then disclosure is not fine, but at the same time, the rulebook may be a broadly sound guide to action with some errors.
My argument is that any rulebook is highly likely to contain loopholes, and that it will therefore benefit from secrecy. The existence of loopholes does not render the rules useless or wrong, but it does mean that secrecy is necessary to prevent manipulation.
You really need to stop saying "If Amex is as smart as you claim..." I do not claim that Amex is "so" smart. I claim that secrecy enhances the ability of their rules to predict default. It is BECAUSE I think their rules are likely to contain loopholes that I think they require secrecy.
Do you agree that a rulebook might contain loopholes, and therefore require secrecy, without being so totally inaccurate as to be worthless?
Never the less, the fact remains that these correlation models are error prone and I doubt that even the institutions who are using them really appreciate how prone to error they actually are.
Nobody's disputing that they make errors.
But you're ignoring the fact that there are limited options here. You can lend money anyone who asks, and go bankrupt from bad loans. You can lend money to nobody, and go bankrupt from lack of revenue. You can establish arbitrary amounts of money you'll loan out, in which case the good credit risks abandon you to get better deals from your rivals and the bad risks stick around to take advantage of the money you're foolishly lending them -- so, again, bankruptcy looms. The fourth and final option is to do the best you can to estimate a person's creditworthiness based on what you know about them.
Credit card companies pick option four. They always have. They always will. You can complain about false positives all you like (and continue ignoring, as you have, the danger of false negatives), but your options are limited to either never borrowing money or accepting that the lender will be trying to figure out how creditworthy you are. That's it. The system is not perfect, but it is constantly improving and works better than any of the alternatives.
Let's assume [edit] for every million customers you've got, one hundred of those customers is getting screwed through absolutely no fault of their own and, worst of all, there's absolutely nothing that they can do about it.
Credit card companies, the people who work for them, the people who invest in them, and the non-delinquent borrowers are screwed hundreds of thousands of times each year, through no fault of their own, because they weren't able to identify a bad credit risk ahead of time. Is there some reason I should care more about your hypothetical hundred innocent victims than the countless victims of delinquent borrowers? Hell, this whole economic mess we're in was CAUSED by dumbasses borrowing more than they could pay back.
Yes, under this system some people will be "screwed" (read: have their credit ratings slightly dinged temporarily). And sometimes innocent people go to prison because all the available evidence points to their guilt and the jury just won't believe their pleas of innocence. Life is hard.
"Both anti-fraud and anti-default rules are relying on imperfect rules and data mining to discover undesirable behavior. If secrecy aids in one of these enterprises, it will aid in the other as well."
That is why arguing that we should not question Amex rules, and instead pay unquestioning deference to their exalted expertise is simply a bogus argument. The demand for secrecy on the part of Amex is an implicit admission that their methods for formulating rules are imperfect and not above reproach.
Nobody is expecting credit card companies to be perfect decison makers. Many of us are simply arguing that the credit card companies would make better decisions in the long run if their processes were subjected to outside scrutiny, and that disclosure of the rules will make credit card customers improve their use of credit in ways that reduce default risk. In addition, the responsible customers can provide input to the credit card companies about loopholes in the rules, and help Amex close them.
You might be a dirty tax cheat, Rob, but most of us citizens are not like you.
Most people would cheat on their taxes if they knew they could get away with it. Study after study has shown that most people will steal if there's no chance of being caught and no known person is hurt by the theft.
"Do you agree that a rulebook might contain loopholes, and therefore require secrecy, without being so totally inaccurate as to be worthless?"
I am not saying the rulebook is totally worthless. I am arguing that the rulebook would be more worthwhile and loophole-free if it were not kept secret. Disclosure provides outside scrutiny of the rulebook done in good faith, and that outside perspective can point out flaws in the rules created by groupthink tendencies among people on the inside.
The demand for secrecy on the part of Amex is an implicit admission that their methods for formulating rules are imperfect and not above reproach.
Amex *explicitly* admits their rules aren't perfect. Stop acting like this is a conspiracy on the part of American Express. The point is that while Amex's rules aren't perfect, they have the net effect of reducing the amount of money Amex loses to deadbeats.
Many of us are simply arguing that the credit card companies would make better decisions in the long run if their processes were subjected to outside scrutiny
They are subjected to outside scrutiny. They just aren't subjected to public scrutiny. Subjecting them to public scrutiny would be idiotic.
Of course, you might just ask your local credit-card fraudsters for the details of the rulebook if you're unclear on them yourself. They know them all already, yes?
"Most people would cheat on their taxes if they knew they could get away with it."
Dan,
But most people still don't, despite the fact that our tax laws are not exactly secret. People are not aware of all the things that might trigger an audit, but they make a good faith effort to be in compliance with tax laws. Moreover, the more that people understand how tax laws work, the better their compliance with said laws are. People who actually make a living helping people prepare taxes often find that compliance problems amoung individuals and businesses are due more often to a lack of understanding about how tax laws apply to their finances than a conscious attempt to cheat Uncle Sam. Moreover, when tax professionals warn their clients about possible flags for tax audits, they do so not to engage in a conspiracy to undermine our tax laws, but to save their clients the aggravation and grief that comes with being audited, even when one has made a good faith effort to obey the law. After all, most of the time it takes far less effort to get oneself in compliance with the law, rather than fake being in compliance with the law. That is why I argue that disclosure on the part of the government will do more to promote compliance of the law than the flouting of it.
Secretary Lyman,
A well fought battle.
I looked into this story this evening, and most of it looks like some pretty lack-of-depth reporting. We are not being told the entire story. Someone above mentioned that the guy recently married- if his spouse's credit history is significantly worse than his, then this might be the reason his credit was revoked. All in all, I would really like to see this letter that was mentioned. I doubt it exists.
eltoro,
After all, most of the time it takes far less effort to get oneself in compliance with the law, rather than fake being in compliance with the law. That is why I argue that disclosure on the part of the government will do more to promote compliance of the law than the flouting of it.
But the law is, as you've said, already fully disclosed. Why should public disclosure of what triggers audits make any difference, if it's easier merely to comply with the law than to fail to comply while avoiding being audited? Maybe the government could explain the requirements of the law more clearly, but that's not what you seem to be advocating.
Would you also urge the IRS to reveal the exact rule that is used to trigger an audit?
Actually, with a little bit of Googling, you can find numerous IRS audit handbooks that provide detailed tips and tricks that auditors are supposed to look for when analyzing the financial statements for various types of businesses. (Hint to entrepreneurs: These guides are actually also quite useful for prospective investors who are trying to learn about an unfamiliar industry. The IRS guys are not stupid.)
So no, even the IRS operates with a fair bit of transparency with respect to these issues. These guides exist primarily to help auditors do their jobs, but they are also useful to business operators who want to keep their noses clean. This is available as public information because the tax system works most efficiently when the rate of compliance is high.
Credit scores are not supposed to serve as a form of entrapment. In part, they are intended to help consumers to know what constitutes good credit worthy behavior and what does not. Those creditors who aren't on the predatory side of the business are better off if consumers maintain good credit, because they presumably want to manage their risks and they are better off if they have customers who can help them to do just that.
Clearly, a lot of posters here simply don't comprehend that the credit system works better if lenders and borrowers find common ground. If the financial meltdown illustrates anything, it's that surprises in the world of finance are not particularly helpful to anyone.
Three points:
1) I have no faith in media hyperventilation, so I don't fully credit the claims which form the basis of this argument.
2) If, and I say again if, AMEX has in fact sent information to their customers which suggests that shopping at Wal*Mart makes them a bad credit risk, then I think that makes them guilty of a breach of faith, not with their customers, but with Wal*Mart. Now, I say this as someone who loathes Wal*Mart and only darkens its doors after making sure I can't buy what they have for sale, at any price, within 100 km. But hate though I do to say it, if these allegations have any substance, they make Wal*Mart, not the consumers, the injured party.
Wal*Mart and AMEX entered an agreement to jointly sell their products; in Wal*Mart's case, cut rate housewares amd other goods, and in AMEX's case, consumer credit. They have some joint obligation to keep faith with one another; if AMEX defames Wal*Mart (and I can think of no worse defamation of a business than to communicate that patronising that business makes you a suspect credit risk), then that clearly makes them unfaithful to the spirit of the joint enterprise. A Wal*Mart employee who published something like this could expect to get fired the next day.
3) I have no inclination to join the pity party for the banks. All the evidence I have seen suggests that the banks, world-wide, got into trouble when they started gambling with derivatives in "investments" so risky they resembled outright Ponzi schemes (as the banks of Iceland appear to have done). I do not consider it unreasonable to expect a minimal level of intelligence, probity, and prudence from professional bankers, and I have frankly run out of patience with the suggestion that bankers lost seven hundred billion dollars (which they then went to US and other taxpayers to cover) because the poor things just couldn't turn down risky consumer credit.
I looked into this story this evening, and most of it looks like some pretty lack-of-depth reporting. We are not being told the entire story. Someone above mentioned that the guy recently married- if his spouse's credit history is significantly worse than his, then this might be the reason his credit was revoked. All in all, I would really like to see this letter that was mentioned. I doubt it exists.
They showed parts of the letter and read from it on the Good Morning America piece. NY Times article and ABC articles have quotes from an AmEx spokespersons saying that they are changing their policies. An AmEx spokesperson also said that the "letters were wrong to imply we were looking at specific merchants". I don't think there is any real doubt that the letter exists.
if AMEX defames Wal*Mart (and I can think of no worse defamation of a business than to communicate that patronising that business makes you a suspect credit risk
If people who shop at Wal-Mart are, in fact, bad credit risks, then saying so doesn't defame Wal-Mart. You can't defame something by stating the objective truth about them.
As for Amex having an obligation to Wal-Mart, you're mistaken. What Amex guarantees is that its card issuers will honor payments made to Wal-Mart *with* that card, provided Wal-Mart performs some basic verification that the card is being legitimately used. Amex is not in the business of promoting how great Wal-Mart is as a company; they aren't an advertising firm.
This is why you can find books badmouthing chain bookstores IN chain bookstores. The store wants the money, and the author wants to sell books. They might annoy each other but that's why it is called "business" and not "happy fun time with friends".
They might annoy each other but that's why it is called "business" and not "happy fun time with friends".
A good business partnership will benefit both firms. Typically you do this by pretending to the outside world that you think each other are a good business. Anything bad you say about each other doesn't leave closed doors. Who do you think would be harmed more if Wal-Mart decided to be "for the people" and stop processing Amex credit cards?
It's bad business practice to publicly state that your own customers shouldn't be doing business with one of your partners. If you feel that way, then why are you partners in the first place? It ends up harming your own credibility more than the credibility of the other firm.
Three responses for Dan:
1) Defamation does not necessarily imply falsehood, although in the American legal system truth provides an absolute defence to a charge of libel.
2) Recent events have thrown into sharp doubt any suggestion that we can define a banker's evaluation of a computer's output as "objective truth".
3) In the example of a chain bookseller selling a book that denounces chains, both parties have the same end in view: sell the book, both work toward that end, and both behave transparently. They may annoy each other, but the bookseller accepts that annoyance in advance. I doubt very much that Wal*Mart would have agreed to accept a credit card whose issuer announced in advance that they would reduce the credit scores of those who shopped at Wal*Mart (assuming for the sake of argument the veracity of the posted reports).
1) Defamation does not necessarily imply falsehood
Yes, it does.
2) Recent events have thrown into sharp doubt any suggestion that we can define a banker's evaluation of a computer's output as "objective truth".
Recent events have shown us plenty of examples of bankers wrongly deciding that someone WAS credit-worthy -- the exact opposite of what we're talking about here. The stories of banks routinely *underrating* people's creditworthiness all come from 5+ years ago when everyone was decrying the cruelty of banks not extending mortgages to the poor. But in any case point 2 is a tautology; obviously if the bank's claim is false then it isn't true.
I doubt very much that Wal*Mart would have agreed to accept a credit card whose issuer announced in advance that they would reduce the credit scores of those who shopped at Wal*Mart (assuming for the sake of argument the veracity of the posted reports).
The reports didn't claim Amex reduced the creditworthiness of everyone who shopped at Wal-Mart (and certainly offered no evidence that such a thing was happening). Obviously if Amex thought "Wal-Mart shopper = deadbeat" it would never have allowed Wal-Mart to accept the card at all.
"Actually, with a little bit of Googling, you can find numerous IRS audit handbooks that provide detailed tips and tricks that auditors are supposed to look for when analyzing the financial statements for various types of businesses"
This avoids the question. I was asking about the exact computer formula used to flag whether to subject a business/individual return etc. to an audit. IRS employees have some discretion to proceed, but they wouldn't even normally see a return that is not so flagged.
I was asking about the exact computer formula used to flag whether to subject a business/individual return etc. to an audit.
You miss the point. One does not require an exact formula in order to reduce his likelihood of being audited; knowing the guidelines of what the auditor looks for is more than enough.
In any case, it's apparent from reading this thread that the libertarians don't even understand the purposes of a credit score. One of its basic functions is to motivate good behavior by providing goals to which a borrower can aspire. Creditors want borrowers to behave in ways that would improve their scores. The score is intended to serve as both a carrot and a stick.
If AmEx is acting in the manner of which it has been accused, then its conduct is antithetical to the concept. That would suggest that its motivations are not being driven by some lofty secret self-defense measures, but by their business plan. With its declining fortunes, I would guess that it has more to do with whatever future plans it has to improve margins than it does with any fear of nasty, mean cardholders.
"You miss the point. One does not require an exact formula in order to reduce his likelihood of being audited; knowing the guidelines of what the auditor looks for is more than enough."
But eltoro was asking for full disclosure of all the rules. Not general guidelines.The IRS doesn't give its exact numerical formula for selecting a return for an audit, and neither will Amex.
"In any case, it's apparent from reading this thread that the libertarians don't even understand the purposes of a credit score. One of its basic functions is to motivate good behavior by providing goals to which a borrower can aspire. Creditors want borrowers to behave in ways that would improve their scores. The score is intended to serve as both a carrot and a stick."
You must tell Fair Isaac that. They've made a good business out of exactly the opposite. Clearly they don't understand the concept of a credit score.
And general guidelines are available, but FICO is not going to reveal the exact algorithms (which is continuously refined anyway) for its credit score either.
The general guidelines to motivate good behavior are obvious -- pay your cards in time, don't carry an excessive number of cards, don't carry excessive debt etc etc. Those have a far greater impact on your credit than where you might shop.
To add to my previous comment -- there is a difference between encouraging good behavior, and between allowing people to game the system.
Example: A teacher could well tell a class before an exam -- focus on chapters 5,6 and the theory of relativity, the exam will focus more on that.
But if the teacher were to give the full exam questions to everyone before an exam, would that encourage good behavior ?
B,
I had already watched the GMA piece. I want to see the actual letter, not be shown quick glances of small sections or to be read to. Sorry, I don't trust journalists at all. In this day and age, it should be standard practice to actually post the evidence in a PDF file, but journalists have been reluctant to do this for the last few years ever since Dan Rather got his head handed to him.
How peculiar... I've actually recently started shopping at Wal-Mart/Sam's Club because I can save a fortune on things I use all the time, like food. Imagine my amazement when I got a letter from my credit card company notifying me that they had RAISED my credit limit. Hmmm... It couldn't possibly have anything to do with the fact that I pay the balance every month, could it?
Some of the murmurs I've heard around the toobz are right — Ms. McArdle is quite stupid enough to take over Bloody Billy Kristol's spot at the Times.
Credit scores are not supposed to serve as a form of entrapment. In part, they are intended to help consumers to know what constitutes good credit worthy behavior and what does not.
RW, now you're conflating FICO scores with credit limts. Amex has not reported anyone to the credit reporting agencies for shopping anywhere. At most, they might cause a small ding because of a reduced balance.
Furthermore, as has been repeatedly pointed out, the actual algorithms used by the credit reporterrs are not public.
So, go off the grid--pay for your ordinary consumables with cash. No data to mine.