Your credit card company is watching you (for now)

The first phase of a new law cracking down on the credit card industry went into effect last week. Card issuers must now give consumers more notice when card terms are changed and an option to reject interest rate increases.

By next February, the most substantive changes in the new law will be in place, including banning card companies from raising interest rates on existing balances unless the borrower is more than 60 days late.

But there’s another key date to mark on your calendar: May 22, 2010.

That’s when you’ll see results of a study on an especially creepy practice by credit card companies, commissioned by a little noticed provision in the legislation. Credit card companies collect data on consumer spending from the millions of card transactions processed every day. Some of them analyze this data and use it to determine how credit-worthy you are.

The card companies believe that sudden changes in spending behavior and certain purchases may signal that you’re headed for financial distress. So, they use spending information to determine whether to make changes to the terms of your card, such as raising your interest rate or reducing your credit limit. What’s unknown right now is what kind of spending can trigger changes, and how big of a factor it plays in determining who is a credit risk. But according to, sudden cash advances, using your card at a second-hand clothing store, gambling at a casino or for bail bond services are the kind of spending that can raise a red flag.

Of course, the card companies use the information for other purposes too, including marketing other bank products to you and to detect fraudulent activity on your card.

A fascinating piece by Charles Duhigg in the New York Times Magazine last year revealed that card issuers also use information on your spending patterns to customize communications strategies and develop psychological approaches to get card holders to cough up payments when they fall behind.

Thanks to the study mandated by the new credit card law, we’ll get a better idea about which companies engage in so-called psychographic behavior analysis and how they use that information. The Federal Reserve, the Federal Trade Commission and other banking regulators must deliver their report to Congress detailing whether credit card issuers engaged in this practice between May 2006 and May 2009 and whether that tracking negatively affected minority and low-income card users. Based on those findings, the Fed will also make recommendations on changes to existing credit card rules or laws to curb card company practices they deem harmful to consumers.

Of course, card issues may decide to halt the practice while they know they’re being studied, at least while regulators are collecting the data. And it’ll take another law to eliminate the practice altogether.

Do you think it’s ok for credit card companies to track your spending patterns to look for risky behavior? Or does this all smack of too much Big Brother to you?

– Donna Rosato

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