What is financial profiling?

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FICO, the company that created the credit scoring system most often used by bankers, reports that your credit score is defined by five simple factors:

• Repayment habits
• Credit card utilization
• Length of credit history
• New credit acquisition
• Account type diversification

Although those facts are known, a less publicized force also has the power to influence your creditworthiness: financial profiling.

It’s no secret that your credit score is partially based on how you spend, but is it affected by what you buy? When it comes to financial profiling, the answer is yes. Despite consumer outrage and FTC criticism, such factors are sometimes used by credit card companies to assess client behaviors and overall risk. Such creditors may decide to reduce limits based on profiling information they identify.

Financial profiling comes with a slew of implications and consumer consequences:

• Assumptions. Creditors using financial profiling tactics sometimes draw harsh conclusions about what you buy. Excessive spending on travel, entertainment, and even healthcare costs could result in lower credit limits. Why? Creditors may view these expenses as frivolous or at risk for non-repayment. Whatever the reason, assumptions play a vital role in financial profiling and creditors’ resulting actions.
• Grouping. Consider the following scenario:

You and your neighbor are both in the market for a motorcycle. You decide to shop together and end up purchasing bikes from the same pre-owned dealership. Despite a high credit score, you realize shortly after your purchase that your credit limit has been reduced by $1,000, but you have no idea why.

While this scenario may be a bit dramatic, the practice of grouping consumers is a common component of financial profiling. Creditors may choose to consider your spending and repayment habits alongside others who have shopped in the same places and bought similar items. If you bought a motorcycle from a dealer whose customers are notoriously delinquent spenders, you could be marked with the same red paint.

• Credit damage. A reduced credit limit is more than an inconvenience. In fact, it can actively damage your credit score by affecting your utilization ratio. Credit utilization is measured based on the amount you currently owe vs. your total credit limit. For example, if Marshall has a credit credit card with a $2,000 balance against an overall credit limit of $20,000, then his ratio is 10 percent. Your credit utilization ratio should never exceed 25 percent. If Marshall fell victim to financial profiling and his credit limit was reduced to $10,000, his utilization ratio would automatically rise to 20 percent, putting him at risk for unbalanced debt utilization.
• Unfair practices. You are probably thinking, “What gives a creditor the right to judge my spending habits?” Countless people are asking the exact same question. Although creditors have access to your personal spending information, do they have the right to analyze it without your knowledge even if you’ve proven to be a reliable customer? Further, is it fair to make account changes based on a list of recent purchases?

While these practices are not often acknowledged, it seems clear that financial profiling can be a significant factor in creditor business practices. If your credit limits are taking an unprovoked nosedive, call your creditor and ask for a written explanation. Contact the FTC for help if they cannot provide the information you seek. Credit is a choice, and you should never be forced to settle for an unfairly damaged credit score.