Credit Limits: It's Not What You Do; It's Where You Do It

Remember a week or so ago a story about how credit card issuers and home equity lenders are cutting back on credit lines even to good customers and/or dramatically raising interest rates?  Well, there is a new wrinkle.

The Atlanta Journal Constitution reported on Sunday that some credit card companies have gone beyond looking at how much its customers spend or how promptly they pay and are now evaluating where they live and even more remarkable, where they shop.

In other words, redlining is apparently alive and well, aided and abetted by the very companies which could not restrain themselves from blindly offering credit cards and balance transfers to anyone who opened the mailbox, even if they were underage and without visible means of support.

The AJC recounts the experience of one Atlanta resident, Kevin Johnson, who recently found his credit limit dramatically reduced by American Express.   His payment history was spotless, his credit score high, and he was nowhere near the card limit before it was changed.  When he asked the company for an explanation he was told that, to quote the AJC, "It didn't like where he shopped."

American Express told Johnson that other customers who had made purchases with their credit cards at places where he had also recently shopped had a poor repayment history.  Instant guilt by association.

Johnson, puzzled, reviewed recent purchases and feels that they were made at stores that are all-American typical.  He frequents Amazon, Starbucks, WalMart, and other places where most of us also shop.  To all accounts there were no charges for on-line casino gambling, adult entertainment sites or large quantities of explosives.

In a conversation with the newspaper American Express confirmed that, in its ongoing efforts to keep payment default rates low, it examines customer spending patterns.  It also takes into account the customer's mortgage lender and whether his home is located in an area where housing prices are going down.  We assume that this means that a subprime mortgage can cause even more problems for the borrower.

American Express told the AJC that a shopping profile would never be the only consideration for a credit reduction; that overall debt was the primary factor.  Mr. Johnson said the explanation given in his letter from American Express that his debt level, repayment history, and length of credit history each played a role in the company's credit decision was "hogwash."

The type of debt and or lender has long been a component of credit scoring.  Fair Isaac Corporation which administers FICO scoring counts a loan from a finance company as a less favorable credit attribute than one from a state or federally chartered bank, but most of the other criteria they use in credit scoring is specific to the individual - payment history, debt level, available credit - and can be rationally accepted as an indication of that person's "Three Cs" of credit, character, capacity, and capital.  American Express's additions have injected criteria into the computation over which an individual borrower has little control.  Thus it is attempting to identify and characterize Mr. Johnson and others of its customers merely by their address and their associations