If You Use Your Credit Card At a Tire Shop Should That Reduce Your Credit Score?

If you visit a marriage counselor, should that affect your credit score? OK, how about a massage parlor charge on your credit card? According to a lawsuit by the Federal Trade Commission (FTC) against credit card issuer CompuCredit – it happens.

Every lender uses a credit score, but even for the widely used FICO score, nobody fully knows what goes into calculations of the formula.

Others use internal proprietary models, and the FTC lawsuit against CompuCredit alleges “deceptive” marketing practice and provides a great (or ugly) insight into the secret business of credit scoring.

In this case, it is about their Aspire Visa cards for subprime borrowers. What the FTC alleges in the suit is that the company didn’t disclose that they closely monitor spending patters and reduce credit lines if cards are used at certain places that trigger a “problem.” Some of them allegedly include tire shops, massage parlors, bars and marriage counselors.

Yes, all card issuers look at your spending patters, amounts, and the places you spend money on your credit card. But the concern is that they may affect your credit in biased or unfair ways as a result. It’s CompuCredit’s second lawsuit, the first was in New York, and was settled for $11 million over its marketing and billing procedures.

Credit card issuers have been quietly reducing credit card limits in any event, mostly without ever notifying customers in advance. With some card issuers running 10% arrears, small wonder. And somehow they’re surprised delinquency is skyrocketing when they were handing out credit cards like candy?

The majority of limit reductions appear to be in geographical areas hardest hit by the housing troubles, including Florida, California, Arizona and Nevada. It is another important reason never ever to have all your financial eggs in one basket – with one card issuer. A lower limit reduces your available credit – the percentage you owe vs. your total available limits and that’s around one-third of your credit score.

Card issuers are pretty jumpy these days and want to prevent losses down the road, rather than just writing off more and more balances reactively. According to the Wall Street Journal, American Express appears to have a new software program that may kick in to reduce limits should cardholders use their credit card at Wal Mart or Marshalls, for example.

It’s only a guess, but it appears that Amex believes charges at these two stores, for example, may predict problems down the road. Is the company thinking their card holders may be in trouble shopping at the “lower-end” stores, or is it a drastic overreaction and incorrect predictor? Time will tell, but I’ve used my Amex card at Wal Mart for decades. It isn’t about financial trouble, for me it’s about avoiding it, by not getting overcharged at other retailers.

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