Credit Card Issuers Used Profiling, Fed Says
By: Bill Hardekopf

NEW YORK (TheStreet) — A Federal Reserve study has revealed that a handful of credit card issuers have used transaction-profiling in making decisions about credit limits and interest rates of cardholders.

The study shows these issuers used this behavior modeling to gauge a customer's risk of defaulting on credit card loans. The Fed didn't disclose the companies in its report.

The report was part of the CARD Act, which required the Fed to investigate whether credit card companies engaged in these practices any time between November 2006 and November 2009.

Of 175 banks and lending institutions surveyed, six used one or more of these practices as a basis for adjusting credit limits, raising rates or making closure decisions on active accounts during the three-year period.

Of the 25 largest credit card issuers surveyed: Two considered the type of credit transaction in a decision about rate increases; four considered the type of credit transaction when regarding account closures; and five considered the type of credit transaction to make decisions about reducing credit limits.

The survey also identified several additional practices that relate to a cardholder's transaction activity including:

Cash advance activity: Some issuers used cash advances as an indicator of risk. One issuer indicated that, for some of its new cardholders, it monitored cash advance activity in conjunction with card purchases at certain type of merchants (for example, jewelry and electronic goods stores). According to this issuer, it has found such behavior among new cardholders to be an early warning of elevated credit risk.

Transaction velocity: Issuers indicated that unusually high transaction velocity (number or dollar amount of transactions in a given period) or even a change in velocity may reflect cardholder behavior that is indicative of elevated credit risk.

Merchant activity: Two issuers used shopping and merchant activity to assess risk. The information was used to divide cardholders into groups with similar characteristics. One issuer considered the performance of other customers within the category to make decisions on account terms for individual accounts.

Mortgage-lender-related activity: Two issuers considered the performance of the lenders where cardholders had mortgages. These issuers cut credit limits for some cardholders who had a mortgage loan from a lender with a badly performing mortgage portfolio or if the mortgage lender accepted very low minimum payments (pick-a-payment loans). Individuals with pick-a-payment mortgages had relatively high delinquency rates on their credit cards.

During the economic downturn of 2008 and 2009, credit card lenders lost billions of dollars in loan defaults. Issuers used a variety of tools to reduce their risk, and this data seemed to be some of the tools utilized by a few issuers. The issuers claimed that if this information was used, it was considered along with many other factors that were more important and carried more weight.

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