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Lindsay Beyerstein catches an important story---an FTC lawsuit against CompuCredit Visa has revealed some of the unusual things that will get held against your credit rating. Oh, it’s not just your income or your borrowing history. Nope. You’re considered a credit risk if you travel more than to work and back and maybe occasionally to the mall, because if you get your tires retreaded, that’s held against you. Good citizens don’t have friends, family, or fun. But what’s really surprising is that if you go to marriage counseling, that’s a strike against you on the credit report.
The FTC claims that CompuCredit didn’t properly disclose that it monitored spending and cut credit lines if consumers used their cards at certain places. Among them: tire and retreading shops, massage parlors, bars, billiard halls, and marriage counseling offices.
Sadly, it actually makes a strange sort of sense. I’m going to bet the bean counters discovered that visiting a marriage counselor was strongly correlated to getting a divorce down the road, which of course can create all sorts of credit problems because of the expense of splitting one household into two. And because divorcing couples sometimes refuse to pay off outstanding debts, each accusing the other of having the responsibility for them. So they flag people who they have reason are a high risk for divorce and pre-emptively strike against customers before the divorce is even initiated.
This isn’t even a causation/correlation error, because they don’t care if marriage counseling doesn’t cause divorce. They’re just looking for any statistical correlation, so they can make educated guesses. If they found that banana eaters were likelier to divorce than non-banana-eaters, they’d probably punish you for buying bananas, too, even if they knew it was just a correlation that in no way implied causation. There’s an irony to this, in that discouraging marriage counseling probably just raises the divorce rate, but I’m assuming CompuCredit was trying to hide their analysis methods from the public and assumed therefore that it wouldn’t matter.
Still, this shows that we have a great rot in our society, with more and more of our economy being based on people being held to utterly unreasonable standards of living that mean you never live just to get by. Don’t have a social life, don’t do anything but go to work, don’t get married, don’t get divorced, etc. Insurance companies would love to exclude people who had more contact with people than was deemed strictly necessary to earn a paycheck to pay them, because the more hands you shake, the higher your likelihood of getting the flu. This is where we’re heading if we don’t do something about it.
It’s similar to the way heath insurance will often be denied if you take anti-depressives. Apparently it’s much better for them if you’re a raging untreated depressive than if you’re under control…
I realize that it’s really because they probably don’t know otherwise. If they could tell at/before birth, your destiny would be set immediately. Which is why they are so interested in DNA research.
If your DNA said you’d be a bad credit risk, the financial firms would use it too. Welcome Gattaca...
For what it’s worth, I would guess that the reason they dock you for having your tires retreaded is because People With Money would just buy a new set of tires. The fact that you have chosen to economize means that you “obviously” are a credit risk.
Vomit.
Thanks for the link, Amanda.
It’s ironic because the lawsuit concerns a line of subprime credit cards targeted at poor consumers. I bet oppomax is right about the underlying reasoning. The company is betting that a lot of the people who get their tires retreaded on credit do so because they can’t afford to replace them. The ironic part is that if you’re comparing risks in a self-selected group of low-income consumers, the retreaders might be the better risks. If you make a point of maintaining your car even when you don’t have a lot of money, you’re demonstrating responsibility and forward thinking that will probably serve you well in the long run, in terms of avoiding accidents and other costly calamities.
Which brings us to the crux of the issue: Secret lending criteria. Credit card companies have secret formulas they use to decide who gets credit and on what terms. They don’t have to divulge them to consumers, or presumably, to their investors. So, for all we know, these secret formulas are based on prejudice and snakeoil.
It’s in the company’s interest to find reasons to give customers worse deals--especially if that company is targeting people who already have bad credit and can’t get better offers elsewhere. So, it’s not surprising that everything and the kitchen sink counts as “proof” of your credit unworthiness when the result is a better deal for the credit card company.
As a non-American, the great rot is that you treat credit-card debt as normal, natural, even essential. More and more of your economy stands and falls on owing your soul to the company store. If credit card debt were a luxurious convenience, and not a necessity, this kind of thing wouldn’t be important.
As I see it, Lindsay, it’s the lending criteria themselves that are the problem. Once a company has a bias against marriage counseling, I’d almost rather they keep it secret, so that they don’t frighten people away from getting marriage counseling. Not totally sure which way the utility calculation works out there, so it’s hard to say. But really what I’d like to see, more than an end to the secrecy, is an end to these vicious lending criteria.
I’ve heard that similar things happen in insurance markets, with insurance companies charging people more if they undertake various preventative measures which are correlated with the problems they prevent. That’s part of the reason why people like community rating, which prevents insurance companies from using anything beyond very general criteria to determine rates.
Is there a name for this kind of market failure?
All of this crap shows just how badly the finance companies are floundering. It’s like the debate over male vs female score in math—the tiny visible difference in mean/median is swamped by the enormous standard deviation. And trying to capture more and more weird bits and pieces of default-correlated behavior may give a company a slight statistical edge (or not), but doesn’t erase the fact that you can find subgroups with exactly the same credit score and wildly different default/late payment rates. (and that’s even before getting into the “against public policy” part of the issue)
But there’s something even screwier than that—whatever else may contribute to defaults and late payments (although these days late payments make finance companies salivate rather than worry), we know that one enormous factor is paying more (interest rates, fees, points, penalties) for the same services. So finance companies are effectively creating the problem that they claim to be attempting to avoid.
The specific penalty for marriage counseling is intrinsically objectionable--especially because penalizing people for seeking counseling is basically punishing them for seeking medical treatment. But the marriage counseling penalty is just one example of what credit card companies can do to consumers without their knowledge. The lack of transparency covers up all kinds of discrimination.
We know about this one company because of the lawsuit, but who knows what else is going on behind the scenes? We know that they penalize customers for charging drinks in bars. Maybe some companies add on a special additional penalty for buying drinks in gay bars.
If companies had to disclose their lending criteria, consumers could make an informed choice about whether to do business with them. Perhaps even more importantly, regulators could examine these criteria and determine whether they violate anti-discrimination or fairness in lending rules.
If I decide to borrow a certain amount of money at a certain interest rate, my calculations are based on the assumption that I’m actually going to be charged according to the terms of my contract, not according to some secret behind-the-scenes formula the credit card company imposes on me.
A correlation doesn’t have to be a cause for it to be a good indicator. Correlation is correlation. And I don’t think credit cards seriously claim to be making life better for poor people, or that making them pay higher interest rates is in the poor people’s interest.
No, the question isn’t whether what they’re doing will make them money. The question is whether it’s right for them to do what they’re doing. And it’s not.
The first question is: What are they doing?
We can’t decide whether they’re doing the right thing or the profitable thing, unless we know what the rules are. Luckily, that’s a relatively easy problem to solve with some good legislation. It’s harder to stop people from lending each other money with esoteric strings attached than it is to force money-lending companies to be upfront about the terms of their deals.
We can’t decide whether they’re doing the right thing or the profitable thing
It’s probably neither. It’s probably a matter of someone inside the company doing something that makes his superiors think he is a hardass, and therefore ought to be promoted.
If companies had to disclose their lending criteria, consumers could make an informed choice about whether to do business with them.
Yeah, I see how that is the important point with the massage parlor / pool hall stuff.
This strikes me as a specific instance of the general problem that credit card companies can change the terms of your loan in unpredictable ways, changing rates and fees. I’ve made it to age 28 without ever having a credit card, partly because payment is more convenient with an ordinary debit card, and because the whole enterprise just looked like a scam.
In general, people shouldn’t have the terms of their credit situation changed at the whims of the credit card company, whether through data mining or whatever. I hope there’s a good way to correct all these problems in one fell swoop.
“I hope there’s a good way to correct all these problems in one fell swoop. “
Declare bankruptcy.
Then die.
<sigh>
So those old guys who used to come into the hardware store and pay for everything with wads of $50 bills they had stashed under the mattress were on to something? Pay for your marriage counseling in cash and they’ll never catch you. Someone help me remember this the next time there’s a thread about how lame it is not to get on board with the latest technology.
Is there anything that good credit risks buy? Subscriptions to investment websites or something? There would be some information we could use.
Stephen, you make it sound like it’s the fault of the victims. People don’t want to be in debt. In fact, something like half of bankruptcies go back to medical bills.
Guess what: if you buy everything with cash, and pay all your bills on time, you’re screwed too. I used only a debit card, paid other stuff by cash or check, made sure I had enough money to buy something outright before I went out and got it (no, I’m not reciting this as any boast of virtue on my part, wait for the punch line) and then when I went out to buy a house the first thing the mortgage guy told me was, “You have no credit history. I’m not sure we can get you a loan.”
I once had my car insurance rates increase when I went from renting a house in one zip code, to buying a house in another, even though I bought a house in a (slightly) more expensive neighborhood than where I rented.
But Stephen got it right:
As a non-American, the great rot is that you treat credit-card debt as normal, natural, even essential. More and more of your economy stands and falls on owing your soul to the company store. If credit card debt were a luxurious convenience, and not a necessity, this kind of thing wouldn’t be important.
I don’t have any credit cards; I get along perfectly fine with Visa debit cards. I get the convenience of electronic payments, and don’t have to worry about interest rates at all.
I think that the ding on marriage counseling is even more insidious - one of the primary caues of marital problems is financial difficulties. By raising the payments a couple in marriage counseling is making, they are actually pushing that couple further towards divorce, which will cause them to sink even further in debt…
Maybe it’s just about keeping us all in debt so that they can be assured of a steady stream of income.
In general, people shouldn’t have the terms of their credit situation changed at the whims of the credit card company, whether through data mining or whatever. I hope there’s a good way to correct all these problems in one fell swoop.
CC companies should only be allowed to pull your credit rating ONCE. Once they’ve decided to offer you credit, then you have a relationship with them. They should be able to decide what they want to do with you from the way you handle your account. Credit report info is just too valuable to be messing around with.
Again, if you have a problem with one card, even if it’s not your fault, but they report it, a different card can look you up and then decide to charge you the 30% interest rate b/c your FICO score changed. This doesn’t even go into the fact that FICO wasn’t supposed to be determining credit-worthiness in the first place.
You can lose your job or not be hired in the first place over credit scores.
You can have a 20 year relationship with a company that’s tossed out the window b/c your credit score changes.
Making credit reports difficult to get and denying companies the right to review them after establishing a relationship with a client would go a long way toward helping.
Getting rid of the health insurance industry and putting all medical care under a unified national provider would go a long way to giving people the right to take care of themselves.
Regulating speculators on Wall Street would help.
We can legislate these things if we want. We can make the republic work for the PEOPLE and not the corporations if we want. It’s not really that hard.
Or we can keep electing millionaire legacies who think war is “romantic” as long as they don’t have to go and like to give all the tax money to their friends without any oversight whatsoever.
hey paul - I know that’s true. It happened to a friend of mine, as well. My comment was rather tongue-in-cheek. But I will admit, I rather naively thought that when they monitored my purchases, it was only for the purposes of advertising to me better. I didn’t realize they also were assessing my credit-worthiness based on the kinds of places I spend money. Time to have a talk with my husband about using the credit card at the liquor store.
What’s the deal with flagging spending in bars and billiard halls? In the UK anyway, probably every non-teetotal adult with a credit card has used it in a bar.
“Guess what: if you buy everything with cash, and pay all your bills on time, you’re screwed too. I used only a debit card, paid other stuff by cash or check, made sure I had enough money to buy something outright before I went out and got it (no, I’m not reciting this as any boast of virtue on my part, wait for the punch line) and then when I went out to buy a house the first thing the mortgage guy told me was, “You have no credit history. I’m not sure we can get you a loan.””
This is why I use my credit card for most purchases. I don’t carry a balance, so I don’t have the credit card companies getting their usury on at my direct expense, but I do have a good credit rating. It also allows me to look at my budget a little more easily, and it was safer back when banks were being complete dicks about covering losses due to stolen debit cards. Only now I find out that I might not have such a good credit rating as I might because, hey, maybe I charged the wrong goddamned thing.
I guess everyone needs to pay for marriage counseling in cash.
you’re demonstrating responsibility and forward thinking that will probably serve you well in the long run, in terms of avoiding accidents and other costly calamities.
And it demonstrates that you’re determined not to live beyond your means. That’s bad news for a credit card company, but very good news for a mortgage company.
Is there a name for this kind of market failure?
Crapitalism.
The problem is directly comparable to the role played by psychiatric records in the family court system. It is universally agreed that the privacy of the records must be respected, that people should be encouraged to get professional help for things like depression, etc., blah blah blah, and legislatures write crystal clear rules that counsel go fishing for these things without establishing a clear, cogent and compelling reason to look at them, blah blah blah, and state and federal appellate courts lay down clear guidelines that such cruel poking around in people’s mental health records is not to be countenanced by motions or trial courts, blah blah blah ... and the dipshit judges keep rubber-stamping orders allowing nasty exes and sharp lawyers to rape the privacy of litigants via disclosure demands.
It’s the extension of the viciousness of rape trials into the civil arena. And now it applies to credit, too! Hooray!
“and legislatures write crystal clear rules that counsel can’t go fishing for these things without establishing a clear, cogent and compelling reason to look at them”
Typo. Sorry.
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It’s similar to the way heath insurance will often be denied if you take anti-depressives. Apparently it’s much better for them if you’re a raging untreated depressive than if you’re under control…
I realize that it’s really because they probably don’t know otherwise. If they could tell at/before birth, your destiny would be set immediately. Which is why they are so interested in DNA research.
If your DNA said you’d be a bad credit risk, the financial firms would use it too. Welcome Gattaca...