I was recently forwarded an American Marketplace show which reinforced something I’ve heard for a while now – credit card companies are watching your spending habits.
We normally think of credit cards as a revolving line of credit. (Actually, most people don’t know what that means…so I guess not, but they know the definition without knowing the term.) You get credit cards, you use them for whatever you want, you pay them off or don’t and incur whatever interest & fees you happen to incur and then you can use them all over again. They’re not like car loans or house loans, where the company pries into the exact details of what you’re buying and assesses you before it loans you the money. … Except that it does.
Credit card companies use automated programs to monitor the types of places you use the card–even if they can’t see what you buy. Go to a bar? Bad sign, maybe you’re worried about your job and using alcohol to cope. Get a massage? Bad sign, maybe you’re stressed at work. Shop at Aldi instead of Giant? Are finances tight? Use your credit card to buy groceries, toiletries, etc? Maybe you don’t have the cash for those things.
Credit limit suddenly drops.
Of course, credit card companies have a reason for monitoring and perhaps even for cutting your limit if you send up a number of red flags. They want to be paid and they have every right to be paid. It’s not actually your money.
What we’re seeing is the lenders playing a much more active role in the lending process instead of just giving laissez faire like we saw in good economic times. Instead of evaluating us for cards up front and periodically checking how we pay them off, they keep checking in on where the money is going and how that lines up with their risk assessment parameters. It’s like we’re applying for our cards & limits over and over again.
Ironically, the best customers for the companies are not the people with the best financial skills. Credit card companies prefer people who carry a balance, but they need the people to be able to make all their payments on time. Otherwise what they hypothetically earn in interest remains just that–hypothetical.
It’s a fine line that these companies are walking, especially since their most profitable customers are riskier bets than they used to be. It only makes sense that they’d use the data from the card to keep closer eyes on the accounts.
What can you do to avoid credit card red flags?
Well, you can give up using credit cards entirely–but if they close your account it may have a bad effect on your credit score. Having a good credit score pays off if you do have to take out loans later on, since you’ll pay less in interest.
A more practical solution is using your debit card or cash if the business you’re patronizing might send up a red flag. Buying drinks at a restaurant looks like eating out, buying drinks at a pub looks like drinking. On the other hand, renting a video should be a tamer activity. Same with going to the movies or buying coffee. Or you can limit your use to a few purchases every month to keep the card active, pay them off promptly, and use debit & cash for everything else.
You shouldn’t be spending money you don’t have anyway, so this may cause a loss of reward points but that’s about it. For most people, reward points are likely to be a thing of the past for the next decade anyway.
If you’re truly dependent on credit cards for meeting your basic needs, then you have more to worry about than just getting your credit limit cut. That would be bad, but it wouldn’t be the only bad thing.
What if these red flags lower your credit limit despite your financial situation staying stable?
Call the credit card company and ask to have it raised again. It’s likely the CSR you get won’t be able to do that for you, but their supervisor may be. To increase your chances keep these things in mind:
- The CSR & supervisor are not personally responsible for the drop, be friendly.
- You are never entitled to a line of credit, or a higher credit limit. What you are is a good credit risk (or not). Don’t take the entitlement approach, persuade them you’re still good for the company.
- You can try again. If you don’t seem like a good risk right now to whatever system the company has in place, you can try again in the future. Perhaps a different month of spending, a different person interpreting the new data, and you look like a good risk again.
Has your credit card limit been cut in the last year? Do you know why? Has it affected you at all?