Why Credit Card Underwriting Is A Disaster

I love credit cards. Credit card companies love me. I get to float balances for up to 30 days interest-free, and I can effectively borrow money at any time, for anything, without answering to anyone. In return, they get to take fees from the retailers that I frequent, and they earn relatively high interest from me if I choose to carry a balance.

Of course this relationship requires discipline on both of our parts. Before getting your first credit card, or using one again, check out the 5 Credit-Card Pitfalls Everyone Should Know About. I started out with a $500.00 limit as an employee of a credit union, which was a great way for me to build a credit score. It’s really quite simple. Pay off your entire balance immediately, and never spend more than 30% of your available credit.

Well I live a little more on the financial edge because I am self-employed, and I understand the consequences of leverage.

For the past eight months, I have been carrying a balance with FIA Card Services, averaging $2,857.55 per day. My limit was $5,000.00. Much of that has been revolving because I have been using this account as my primary card for all recurring purchases online. A few months ago, they decided to suddenly reduce my limit to $3,600.00 (see the SmartMoney article above). Obviously I appeared to be more of a risk. In fact, my credit score will now drop because they have changed the denominator in their own balance/limit equation.

But here is the first problem. I had more available cash in my deposit accounts when they arbitrarily lowered my limit than I did when they first approved me for the card. This brings me to issue #1: Credit card companies don’t consider your assets. They only look at a snapshot of your liabilities/score, your payment history, and your stated or past income.

So last week I paid the balance down to 4.18% of the available credit ($150.51). I anticipated that they would recognize this opportunity to mitigate their risk further, and lower my limit again. If they do, they will check my credit report and potentially see balances on other cards as well because each company has a different reporting date. Now we reach issue #2: I get real-time information on the device in my pocket, but creditors only report to the credit bureaus once a month. The snapshot that they get today reflects my activity from a random date in the past month. If I took out a $100,000.00 cash advance on another card and used theirs to buy a ticket to Thailand, they wouldn’t know until it was too late. Why doesn’t the industry have access to real-time information?

My real beef: After paying down over 90% of my balance last week, FIA didn’t simply lower my limit. They closed my account entirely. So now I have to move all of my recurring online purchases to a different card because FIA no longer wants the associated fees. And it is not coincidental that my account was reviewed on the day following my $3,000.00+ payment. Their credit analyst admitted that they saw this as an opportunity to review my account and assess their risk. So let me get this straight: One day/week/month earlier, I had a balance of > $3,000.00. Today I have a balance of $150.51. My credit score and payment history have not changed. But now they want to close my account so that I don’t charge another $1.00. This can only mean one thing: They were concerned that I would default in anger if they closed my account earlier. They no longer saw any value in having me as a customer, they were only concerned with recovering their investment. In other words, I was already dead to them. I’ll receive written a notification six days later, and I’ll have to manually make future payments since they terminated my automatic bill-pay.

In summary, #3: Credit risk decisions seem to be ‘all or nothing’. I probably didn’t deserve a $5,000.00 limit as a new customer asking for credit eight months ago, but I surely deserve a limit of > $0.00 today. Credit card companies need to understand the concept of lifetime customer value. Surely there are millions of people that get denied or their accounts closed, who could really use a credit card with a limit of $100.00, $50.00, $10.00…why not let them slowly develop a track record with your institution? I don’t know what the cost is to acquire a credit card customer, but it doesn’t make sense to turn away over 15% of the people who come knocking simply because they have insufficient history.

One answer may be social-media-driven underwriting. This has been rumored as a part of the Bank 2.0 trend, as led by MovenBank and Simple. Some customers may even become loss-leaders based on their Klout score.

Obviously the solution here is to charge < 30% of your available limit and/or pay your balance before it is reported – not to mention before you accrue interest. If you want to use the card according to the terms of your credit agreement, assume that they will change at any time without notice.

One thought on “Why Credit Card Underwriting Is A Disaster

  1. Now you’re making me nervous. We opened a 0% interest card a few months ago and we are using it to buy Moroccan plane tickets for which we will be paid back in a couple of months. I bet it is over 30% of the limit … I hate credit cards. So many loopholes and easy missteps that seem unpredictable. How can you navigate the system if you don’t know what the rules are?

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