Tuesday, October 7, 2008

American Express Rates Credit Risk By Where You Live, Shop


For those of you who read my blog on a regular basis, you're yawning at that headline. American Express rates credit risk by where you live and shop? Next thing you'll be telling me is that the sun rises in the east. Who knew.

Actually, that headline comes from MSNBC.com this morning. Apparently, MSNBC is finally getting around to warning its readers about American Express's most recent risk-management tactics. Anyhow, back in July I wrote this story about American Express's game plan (link here) (and my game plan as well). Meanwhile, I have highlighted how shopping choices hamper your ability to get credit-line increases (link here) as well. And, last week, I discussed American Express's slash and burn campaign (link here).

All of that said, my readers (especially the readers who have an American Express card) can never read too much about the card company they've decided to do business with. As such, you should read MSNBC's story this morning, which details American Express lowering limits on a customer who looked ripe for a fall (lots of warning flags flying over this customer).

From the MSNBC story: Amex rates credit risk by where you live, shop (link)

Asked about the letter to Gilleland, which cites shopping practices and merely obtaining a mortgage from a lender who also loans to other borrowers with "credit risk," Forde said, “You have to remember that this is one contributing factor. That’s not the sole reason, but it’s certainly data that we’re looking at.”

And this passage:

Ed Mierzwinski, federal consumer program director with the U.S. Public Interest Research Group, said, “There’s no question that this type of behavioral score is used by everyone. They just don’t like to admit it. … It sounds like American Express is dialing up the impact.”

When you read the story, take note of some of the things Mr. Gilleland was doing. He was funding his business with these cards. What's not clear from the story is whether he held Amex business cards. If they were personal cards, there was probably a clause in his credit card agreement that said the card could only be used for personal expenses -- not business expenses. It's difficult to know if that played a part as well.

Additionally, Mr. Gilleland appears to be on the financial ropes. His house is upside down and his expenses for the business have been climbing. Higher expenses aren't bad in and of themselves, but if revenue is not climbing even faster, you've got trouble. What's more, American Express cited these reasons for the credit limit decreases: payments that were too small (not paying enough of the balance off each month). His utilization ratio was too high for Amex's tastes, too many inquiries, too many new accounts (lowering average age of credit history), too many consumer finance company accounts on the credit report (usually lenders of last resort), and weak credit score. Amex is probably spot on here. Mr. Gilleland looks ripe for trouble. See the American Express letter here: American Express Letter (link here).

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36 comments:

Hkbushido said...

I live in Dubia? Where is my Amex centurion damn it?

Don Miguel said...

Sounds like it's high time for some amendments to the FCRA to require disclosure of these secret scores and their criteria since they're used to calculate creditworthiness. Or perhaps the regulators need to look for statistically disproportionate effects on protected classes.

Credit Matters said...

Yep. It is probably time for more disclosures, DM. Creditors are using vague language that allows them to do almost anything. But I think that some specific disclosures might be necessary here.

Cosmo's Human said...

I'm glad I'll never have an AMEX card. Even though I'm over 700 now. They don't like me. I guess being a social worker isn't a highly prized occupation to AMEX. It sounds like they are going to have a few discrimination suits. Where you can shop, what you buy? Can you see where I'm going with this? Redlining anyone?
HM

Far Left Texas said...

I used to be a HUGE Amex fan. Platinum personal card, gold corporate cards and many hundreds of thousands of dollars of spending over the years.

But why punish the merchants I do business with by making them suck up the extra 1-1.5% that Amex takes in merchant fees?

And I really would like to see someone challenge Amex's "We're lowering your limits/closing your cards because of where you shop" in court. The merchant has to apply with Amex to accept their card, then Amex penalizes the care member for using their card in/at that establishment? What's wrong with this picture?

Especially if you won't tell me who those merchants are.

And punishing me because of who my mortgage company is? Maybe I chose XYZ Mortgage because of their rates or service or just because the mortgage officer offered me a cup of coffee. Who I make my mortgage payment too has absolutely no bearing on my ability to repay.

If I send a check for $1,976.18 to Wells Fargo I'm a good credit risk, but if I send that exact same $1,976.18 to Mack's Mortgage Market I'm suddenly a poor credit risk?

Credit Matters said...

Cosmo, it will be interesting to see if someone eventually challenges this stuff. Not sure what their cause of action would be, but it would be interesting to see what some enterprising lawyer could come up with.

Credit Matters said...

FLT, very interesting that Amex is highlighting its own trading partners. You should with one of our partners. Bad, bad.

Cosmo's Human said...

Marcus, What are the AMEX "trading partners"?

OT: Go get tho douche bag who is ruining your good name! Where's Dirty Harry when you need him?

HM

Credit Matters said...

Sorry, Cosmo. Merchants. Should have been more clear there. Amex merchants.

Cosmo's human said...

Marcus, No problemo. Does Wal-Mart know or care if you use AMEX @ their store, you'll be in danger of losing your AMEX card(s)?

Just for sh&ts and giggles I'd like to know where the AMEX card is verboten. (Beyond the obvious porn, home shopping, ect)

Credit Matters said...

Cosmo, would be interesting to see what Walmart thinks. But then again, we're merely guessing that Walmart is one of the places that are dangerous to shop at.

And we would all love to know where the danger spots are.

Here's what I think it is, though. It's not the merchant per se. Instead, it's the shoppers. It seems that a lot of high-risk customers are shopping at certain places. Doesn't make the merchant risky -- it's just that customers are shopping at those particular places.

Cosmo's human said...

Maybe using the card for "everyday" items, like food? I pay good 'ole cash at the grocery store, gas station, ect.

It feels like AMEX are acting like nazis and it's 1939 again.

Credit Matters said...

Cosmo, simply impossible to know. I do not use my card at grocery stores. I try to use it for purely discretionary items.

Credit Matters said...

Got the original message deleted over there. That was my goal.

azntg said...

Kudos Marcus! You beat the mainstream media on figuring out the pattern and exposing it to the public, at least two months in advance or so.

I wonder if they actually lifted many of the things straight off this blog? The MSNBC article sounds almost like a slightly edited, rolled-up version of all the things you said about Amex in this blog.

Formerly known as "Jim in the City of New York"

azntg said...

Forgot to say:

Nobody likes playing a game of Minesweeper with money and credit, which is effectively what American Express is forcing its cardmembers to do.

They really gotta work on that. Either disclose or end the gambit!

GlobCredit.com said...

Azntg (Jim), I imagine that the writer cobbled a bunch of information together.

Even when I put stories together, I have to go out there and figure stuff out.

I will only say that MSNBC is very late to this game. But it's good that a big news outlet is getting the information out. That's all I care about.

Get the information out to consumers.

GlobCredit.com said...

Azn, I agree. It might be time to disclose. Also, this is not good publicity for American Express. People are afraid to apply with Amex right now.

Anonymous said...

Why do you have an ad to apply for an AMEX card on your blog?

GlobCredit.com said...

American Express is an affiliate advertising partner. I have an American Express card. Doesn't mean I can't write critically about the company. I imagine that there are people who visit my site who might be interested in a card. After reading many of my stories, though, I imagine those ads don't get many hits, though.

Thanks for asking.

Josh said...

Cosmo's human: The whole purpose of getting American Express charge cards is to charge everyday items and lots of them(i.e. the spend centric amex consumer) and as it is a charge card, it would be paid off at the end of the month. Millions of customers do so every month without fail, I think it's a combination of many factors and coupled with specific purchases has in Amex's eyes shown a higher risk.

In the letter when it refers to which company the loan was taken out from I'm pretty sure amex means also what kind of morguage you have with that company. i.e. I don't think it's just countrywide or any particular bank, it's ARM's, subprime mortgages etc. that amex can see in your credit report and ding you for it.

As this was for a charge card, I don't see how this will cause his company to fold though - I mean, if it's that critical you would use a debit card....

GlobCredit.com said...

Josh, wasn't the Mr. Gilleland also using American Express credit cards? He must have been playing the float with the Amex charge cards. Probably just making the payments each month -- because of the 30 days he had between cycles.

In this particular case, I really think there is more to the story.

The Lion said...

I think it is so wrong that they can use where you live and where you shop as a reason for AA. Seems rather discriminatory to me....

I think creditors should have to be extremely explicit in their reasons for AA. For example "we saw that yourXX account was reporting ________ on EX/EQ/TU. Because of this we are doingXXXX" Might take longer to get those letters out but hey, it would keep 'em honest!

The Lion said...

By the way! LOVE the ad right above the comment box:

"Credit Crisis Concerns? 20% off FICO scores"

Something about it just makes me smile.

Don Miguel said...

Lion, I'm sure those bankers are mostly pining for the good old days when they could use whatever criteria they wanted and not have to give reason. Someone pointed out that other banks are probably doing the same thing, but are hiding behind the CRA reason codes, which could explain AA against people for whom the reasons had already appeared on their reports when they had originally applied. The use of these kind of data in credit decisioning is an area ripe for tough regulation.

GlobCredit.com said...

Lion, I just figured that readers could use the discount. Ha!

GlobCredit.com said...

I think DM has it right. Amex, and companies like Amex, are asking for tougher regulation. While this kind of stuff is not a surprise to my readers, I bet people are shocked by this. They'll be up in arms about this kind of risk-management process.

The Lion said...

Call me a left wing conspiracy theorists but -- somehow I don't think Amex (and other companies who do this) is targeting the boutiques in the upper middle class suburbs....

GlobCredit.com said...

You are a nut, Lion. Happy? Haha.

Hey, you never know. Anything is possible these days.

Anonymous said...

Great site! I just found you through Fatwallet...excellent information about AMEX and credit cards overall....definitely will book mark for daily reading!!

Sean said...

Probably should get the story right... There's MUCH more to this story than the MSNBC article leads onto. Here's a copy of the actual letter Gilleland received from Amex (PDF):
http://msnbcmedia.msn.com/i/msnbc/Components/ArtAndPhoto-Fronts/SPECIAL%20PROJECTS/Amex_Limit.pdf

Take a look at ALL of the negative things listed. After seeing that, I don't see why Amex (or any other bank) would want to be holding that bag.

GlobCredit.com said...

Sean, at the end of my piece, I said this: "Additionally, Mr. Gilleland appears to be on the financial ropes. His house is upside down and his expenses for the business have been climbing. Higher expenses aren't bad in and of themselves, but if revenue is not climbing even faster, you've got trouble. Amex is probably spot on here. Mr. Gilleland looks ripe for trouble."

I agree. Looks like American Express was taking control of the situation earlier rather than later. But thanks for the comment. And thanks for the PDF file.

GlobCredit.com said...

Anon, nice to have you here from FW. Hope to see you on a regular basis.

Take care.

GlobCredit.com said...

Sean, I just reviewed that American Express letter again.

There are a lot of red flags flying over that customer.

The guy was making payments that were too small. His utilization ratio was too high for Amex's tastes, too many inquiries, too many new accounts (lowering average age of credit history), too many consumer finance company accounts on the credit report (usually lenders of last resort), weak credit score, etc.

This guy was in trouble.

Sean said...

CM,
Exactly... I didn't have much sympathy for the guy when I read the MSNBC article, but after seeing the Amex letter I don't see why he's complaining. I was curious as to what constitutes a "consumer finance company." Not sure what it is, but it's not a bank so it can't be good. One thing's for sure -- I know I wouldn't be lending money to that guy right now. I don't blame Amex for not wanting to do so either.

The real headline of the story should have been "Amex cancels accounts of people who are high risks for default" but of course that's not news. Not sure the reporter truly understood the implications of the actual Amex letter either.

GlobCredit.com said...

Sean, consumer finance account: think furniture stores that give you credit. Often you have a company like CitiFinancial as the creditor. The teaser rates are great, but once you come out of the promo period, you are socked with $20%+ rates. These are lenders that usually cater to the sub-prime crowd.

And, Sean, yes, the story should have been titled something else. I think the author was just really excited about seeing a creditor dinging people for shopping choices. That kind of story is not news to my readers here. The author is really late to that party.

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