Sunday one of my media contacts told me that he had found out that credit card companies have already started reducing their customers' available credit based upon their shopping patterns. He said that card issuing banks are looking at where you use your card. If they determine that other customers who shop with the same merchant have a higher default rate than normal, they will then classify you as a higher risk and reduce your credit limit - even though you have a perfect payment history. One of the merchants that he specifically mentioned was Wal-Mart.
"Guilt by association" or profession is not new. Insurance companies, who are masters at the risk game, have long used this technique to screen out potential problem clients. For instance, if you are an emergency room physician, since your colleagues have a higher tendency to stay out longer on disability than general practitioners, some companies will refuse to write you a new disability policy or do so only at a higher rate. Male florists likewise have a problem buying life insurance due to a higher number of their associates contracting HIV or AIDS. I'm not saying that this insurance industry practice is right or wrong. Let's face it, if the company that insures you raises your rates because they also insure people who are reckless drivers, do you really want your rates to be more expensive so that you can help cover those you are not as responsible as you?
Nevertheless, applying this same logic to credit card holders is something that may be a real stretch. Deciding to reduce credit card limits on the purchasers who use "Store A" may make sense to some bean counting statistician working for Citi Bank or Bank of America, for instance. However, how do you as a typical card holder know where you should or should not purchase. Buy a book on line and have your limit reduced from $1,000 to $100 - of course, you have a balance of $295, so now they charge you a $39 monthly over limit fee. Is it better to buy at Neiman Marcus rather than Wal-Mart? Should you stay out of auto parts stores? Who knows? I assure you that I don't. To avoid higher insurance rates you can make healthy life style choices. But, what can you do avoid getting your credit limit slashed? There is no answer since credit card companies are not disclosing the variables which they are using to make their decisions.
Here's the other problem. Our economy needs increased consumer spending if the recovery is going to take hold. Government stimulus cannot do it alone. Well, with the credit card companies ritually reducing credit limits, then consumers who rely on the "safety" that is afforded by their cards should an emergency or unplanned need arise, normal consumer spending is suppressed. Therefore, the Obama Administration's efforts to "get credit flowing again" will continue to be hampered by this overreaction among the card issuing banks. The new tendency to lower limits based upon where you shop is just another one of the amorphous, hidden reasons for your credit availability to disappear. While their practices may seem logical to some extent, the reduction of purchasing potential by approximately $27 trillion -- no, this is not a mistake. I mean trillion not billion - will further retard the recovery of the economy. This short-sighted move on the part of banks is designed to produce quick profits without understanding that they are ruining long term relationships with current and potential customers.
This problem is just another reason why we cannot rely on the credit industry to promote our economic recovery. Simply as consumers we must take the initiative by once again starting to spend. (Notice that I did not say spend by using your credit card and going further into debt.) If every American spend ten more dollars a month than originally planned $3 billion dollars will be pumped back into the economy. Too many consumers lack confidence in the economy. However, they must correct themselves and realize that they "are the economy." Once they finally wake up and start spending the economy will turn around.