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Am I a lab rat in the credit card industry’s psychology experiment?

Jeremy Simon

I have a confession to make: You won’t find birdseed or carbon-monoxide detector purchases on my credit card statement. Neither will you find charges for chrome-skull car accessories or drinks at Sharx’s Pool Bar. But you will see that I used my plastic for groceries, smoothies, sporting goods, gasoline and concert tickets.

lab-rat.jpgMy credit card issuer needs no confession. With every swipe, the bank gains a window into both my shopping habits and my psyche. If you are a cardholder, they are working to understand your psychology, as well.

Think I’m being paranoid? Then consider a recent article in the New York Times Magazine that looked at how, starting with one Canadian retailer, banks began to use consumer purchasing behavior as a way to predict whether cardholders are likely to repay debts — or go delinquent. That’s become an increasingly important consideration as card delinquencies skyrocket amid the economic recession.

“The exploration into cardholders’ minds hit a breakthrough in 2002, when J. P. Martin, a math-loving executive at Canadian Tire, decided to analyze almost every piece of information his company had collected from credit-card transactions the previous year,” the Times reports.

Martin’s retail data showed who was likely to repay their debts.”People who bought carbon-monoxide monitors for their homes or those little felt pads that stop chair legs from scratching the floor almost never missed payments,” the Times reports. As for the “safest” products put on plastic, those were found to be premium birdseed and a “snow roof rake” device used by homeowners to remove high-up snowdrifts so they don’t fall on passers-by. The people who make such purchases apparently care about protecting themselves, their belongings and other people. That translates into a simultaneous desire to maintain solid credit histories. As for the bird feeders, banks “basically figured out that the types of people who do that, pay off their credit card on time, because they feel this sense of moral obligation,” the Times’ Charles Duhigg (who authored the article) tells Public Radio’s Marketplace.

Other cardholders are more drawn to skulls and sharks. “Anyone who purchased a chrome-skull car accessory or a ‘Mega Thruster Exhaust System’ was pretty likely to miss paying his bill eventually,” the Times reports. Such individuals were also likely to frequent the “riskiest” drinking establishment in Canada, Montreal’s Sharx Pool Bar, “where 47 percent of the patrons who used their Canadian Tire card missed four payments over 12 months.”

“If you show us what you buy, we can tell you who you are, maybe even better than you know yourself,” Martin somewhat ominously tells the Times.

What began as one man crunching numbers has evolved into much more. “Data-driven psychologists are now in high demand, and the industry is using them not only to screen out risky debtors but also to determine which cardholders need a phone call to persuade them to mail in a check,” the Times reports. “Most of the major credit-card companies have set up systems to comb through cardholders’ data for signs that someone is going to stop making payments.”

So where does that leave cardholders? The sudden desire to put groceries on plastic could suggest to the bank that we no longer have the cash on hand to buy bread and milk, triggering a lower credit line or higher interest rates in a pre-emptive attempt to guard against losses. In my case, charging groceries is a regular spending pattern. But does a relatively unusual purchase of rock climbing gear at REI signal to my lender that I may be planning to go off the grid — and into the hills — in the near future? Probably not, but then maybe they know something about me I don’t. While the banks closely observe our shopping psychology, we are left with no way to know what they are thinking.

Additionally, the Times says that innovations like Capital One‘s Card Lab — which enables consumers to tweak their annual fees, interest rates and reward points — help banks evaluate how individual cardholders’ value different card features. That has seemingly made it even easier for issuers to understand our motivations and thought processes.

“The industry doesn’t have to drop rats in a maze anymore,” the Times reports. “We’ve started going there on our own.”

See related: What electronic payments reveal about you to lendersCredit card charge-offs, delinquencies break records again

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  • On the one hand, companies should be allowed to assess customer risk based on the data they have. On the other, it’s really unnerving to think that how we use our credit cards could impact rates/fees. Any thoughts on whether the upcoming credit card legislation will limit card issuers’ ability to use this data to change card terms?

  • THowell3

    No offense, but you’re lower than a lab rat. The lab rat get’s food and water. The lab rat has a soft spot to rest between trips thru the maze.
    You? You’re an abstraction. You’re a variable in an equation. You’re a scenario. “YOU” don’t really even exist.
    You’re past behavior is reduced to zeros and ones to predict your future behavior.
    Philip K Dick had precogs stopping crimes before they occurred. Ask Tom Cruise how that worked out…

  • Burt

    Quite frankly IMHO, *what* you purchased should be none of the CC companies business. The only reason they have the data is to be able to print the product name on your statement. They should not be able to use it for anything.
    I suspect this has been goig on for a lot longer than we think.

  • Jeremy,
    Great post. It looks like we’re all rats. Yet another advantage of paying cash?

  • Dough Roller,
    In response to your question about the new credit card law and how it deals with monitoring card purchases, there is nothing in the law that prevents a card company from using purchasing data to change card terms. However, interest rates on existing balances can only be changed for a limited number of reasons. There are no restrictions on interest rate hikes for future card purchases.
    The new law does ask the Federal Reserve and other banking regulators to look into whether card issuers using purchasing data and store location as a basis for lowering credit limits or increasing interest rates between the period of May 22, 2006 and May 22, 2009. The regulators must also make recommendations on laws to address the problem.
    The study is included in Section 505 of the Credit CARD Act of 2009. Read the act:
    http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h627enr.txt.pdf

  • Not entirely true

    Credit card companies can’t tell if you purchased bird seed or not. They only see that you made a purchase at Home Depot. The company that has the detailed purchasing behavior is the retail store. Its exactly what Amazon does when you buy a book. They’ll recommend 3 other books that fit the same category/storyline.