Consumer groups criticize use of spending data for credit scoring

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Your credit score isn’t the only thing banks and credit card issuers look at when determining the terms of your account. Many of them build a whole profile based on your purchasing habits. If they think you’re having personal or financial problems, they’ll shrink your credit limit, or jack up your interest rate, or even cut off your credit altogether. It’s called behavioral scoring, and as Tanya Snyder reports, some consumer advocates are fighting back.

Behavioral scoring came into the spotlight a few years ago, with a class action suit against subprime credit issuer CompuCredit. The suit was mostly about hidden fees, but it also revealed the company’s data-mining practices. CompuCredit was treating some customers differently based on speculation about bad credit risks. And customers felt like their privacy had been violated. Josh Frank researches behavioral scoring at the Center for Responsible Lending.

JOSH FRANK: They include whether somebody bought retread tires, whether somebody received marriage counseling or counseling in general. Whether somebody frequented bars or spent money at bars, those kind of factors were the kinds of things they were looking at.

Frank says another consumer was discriminated against for shopping at Wal-Mart. It may have been the fact that they shopped at a discount store, or it may have been the neighborhood the store was in. Sometimes geography counts against you too. Even living in an area with a high foreclosure rate can hurt you.

Robert Manning, the author of “Credit Card Nation,” says though behavioral scoring has been around for a while, the practice increased with the credit crisis.

ROBERT MANNING: The pendulum has swung from literally anybody with a pulse was qualifying whether you had a job or not to now incredibly stringent measures now about qualifying for credit. And what the banks are doing is they’re even more willing to exclude good customers if they keep out a bad customer who might default on a loan.

He says banks are punishing people for shopping within their means. Instead of rewarding people for shopping at discount stores and pawn shops, the banks cut off their credit.

MANNING: Any prudent behavior could be interpreted as serious financial distress from a middle class perspective.

Manning and Frank say that behavioral scoring became a favorite tool of credit issuers once they realized the unreliability of standard credit rating scores.

Frank authored a report on behavioral scoring last month, and the Federal Reserve studied the issue this spring at the request of Congress. The Fed study downplayed the prevalence of behavioral scoring, saying that only six banks use the practice. But Frank notes that five of those six are among the largest banks in the country, affecting a huge number of people. The Fed notes that in one month, only 1,900 people were affected, but it only counted people whose credit terms changed and who were informed that behavioral issues were the reason for the change.

Advocates say that even if no adverse action results, most people find the data-mining to be an invasion of privacy.