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August 26, 2008
Behavioral Credit Scoring Opens New Vistas in Niche Cards
Oh, man:
“The FTC suit against Atlanta’s CompuCredit for allegedly ‘deceptive’ marketing practices offers a rare look inside the opaque business of credit scoring. It reveals mechanisms that consumer advocates and politicians have long suspected exist — in which purchasing behavior, not just payment history, matters.
“The allegations, in part, focus on CompuCredit’s Aspire Visa, a subprime credit card for risky borrowers. 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.
“‘The company touted that cardholders could use their credit cards anywhere,’ says J. Reilly Dolan, assistant director for financial practices at the FTC. ‘What they didn’t say was that you could be punished for specific kinds of purchases.’”
(Link)
Obviously & up front: It’s CompuCredit’s credit to extend or deny.
My first inclination is also to say “Well, a company behaving like that is probably doing people a favor by reducing the risk they’ll borrow much money from it.”
On the other hand, there are less obvious dynamics at work. One, for instance, is what happens to people trying to rebuild credit using CompuCredit’s cards who find their limit slashed. Credit scoring models include the amount of available credit one is utilizing, which means someone responsibly utilizing less than 50 percent of available lines of credit could find him or herself with a reduced credit score by buying the wrong thing.
As the article notes, there’s also the usefulness of this kind of model in enabling discriminatory lending practices:
“The worry is that companies may tweak the credit scoring systems in unfair or biased ways, weeding out or limiting borrowers based on race, gender or sexual orientation. (In the case of CompuCredit, regulators are taking issue with the lack of disclosure, not specifically its use of behavior-based scoring.)”
I’m thinking that if behavioral scoring doesn’t raise any regulatory flags, we’ve got a potential growth market in special credit cards for assorted subcultures. You could sell the whole behavioral tracking model as a kind of disciplinary aid by making adjustments to the interest rate or credit limit for all sorts of things: liquor store visits, gasoline consumption, shopping at merchants under boycott from assorted advocacy groups, buying from small or local businesses, etc.
So, your “Sustainability VISA” might make incremental cuts to your interest rate for buying your coffee from the locally owned coffee store instead of Starbucks, or push your rates up for buying from Whole Foods instead of the more local New Seasons, or cut your credit for buying from Amazon or Barnes and Noble instead of Powell’s.
I’m sure PETA & Focus on the Family could come up with good tables of rewards and punishments for their respective constituencies.
The punitive model appeals to me, too. I’ve already got a few “rewards VISAs.” Maybe it’s time for a special “punishments MasterCard.”
It seems, however, CompuCredit isn’t doing so well:
“The complainant alleged that those stakeholders of CompuCredit involved in the action, materially misrepresented the company’s solvency in violation of the federal securities laws by publicly praising the strength of the company’s credit card marketing and collections services, falsely touting the growth of the company’s credit card business, falsely claiming that the company was in compliance with applicable federal regulations and misrepresenting the FDIC and FTC investigations into the company’s accounting practices.”
Posted by mhall at 7:53 PM | Add Comment
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