10 Purchases That Can Harm Your Credit
Do you live your life as if everything you do could be made public? I once heard a suggestion that you should judge every decision you make based on whether you would like to see this decision on the front page of the New York Times. That is a good theory, but I can’t say I fully live by this philosophy.
Regardless of the life decisions I make, my purchase decisions are being recorded and analyzed. Almost all of my spending, particularly my major spending, is accomplished through a credit card. I only buy what I can afford and I pay the bill in full every month, but the fact I don’t enter debt or pay interest fees is besides the point.
Based on the places I shop, credit card companies may decide that, based on studies and calculations of the American consuming public en masse, I have become a riskier consumer. If I shop at Some Discount Store, and the algorithms show that people who shop at Some Discount Store are more likely to miss payments or default on a loan, the credit card companies can increase my rates or lower my credit limit. They can change the terms of my credit agreement without missing a payment, exceeding my credit limit, or using a higher percentage of my available credit. Yes, the credit card companies can decide to categorize me in a lower “credit class” based on where I shop. The Credit CARD Act of 2009 doesn’t change this possibility.
If the credit card companies decide to place me in a lower class of consumer, they could increase my interest rates or lower my credit limit. With less credit available, my credit score could be negatively affected. A lower credit score could then have significant financial consequences; I may not qualify for as low as an interest rate on a mortgage than I would have otherwise.
So if you are concerned more about what the credit card companies think of you than you are about what your friends and family think of you, avoid raising a red flag with your banks by choosing cash for these ten purchases. These were suggested by American Public Radio’s Marketplace show.
1. Traffic tickets. If you are more likely to speed and get caught, and to pay for your ticket or court fees with credit, you are a bigger credit risk. Because people who pay for tickets on their credit card tend to default on their payments more often, the credit cards may place you in a lower category of borrowers.
2. Retreading your tires. If you choose to retread rather than replace tires, credit card companies assume you do not have the money to properly maintain your possessions. And if the issuers believe you have less money than you may have indicated when you applied for the card, they might choose to reduce your benefits.
3. Bargain stores. Marketplace points out that American Express has been accused of lowering customers’ credit limits just for shopping at Wal-Mart. That sounds like class discrimination disguised as risk management, but the issuers argue that a change in shopping behavior in a direction of bargain stores indicates concern about money, and if that concern is legitimate, a job loss might be on the horizon. Following the thread, unemployed consumers are more likely to cause a problem for credit card companies.
4. Porn. While the Marketplace article says adult entertainment is simply considered escapism, and those who wish to “escape” may do so due to financial conditions, it seems more likely that credit card simply find consumers of porn to be riskier than others. I wonder if there is any distinction between local strip clubs and high-class escort establishments.
5. Marriage counseling and therapy. If your relationship is on the rocks, divorce might be imminent. Divorce brings on financial problems of its own, such as increased debt and even bankruptcy. The credit card companies will want to cover the possibility of future losses if they believe you are likely to go through a divorce.
6. Lottery tickets. Considered a tax on the poor, lottery tickets are purchased overwhelmingly by people without much money; perhaps winning the jackpot is seen as the only way for people who may not have been given the opportunities of the middle class, or those who had the opportunity to succeed but did not take advantage of them for whatever reason, to build a successful life. Credit card companies see lottery ticket purchases as acts of desperation, and those who are desperate are greater credit risks.
I must confess that when a co-worker goes from cubicle to cubicle, collecting a dollar from each of us to play in the large-jackpot lottery, I still contribute most of the time — not in an act of blind hope but in an act of being social. My coworker doesn’t accept credit cards, though, so I stay out of the banks’ radars.
7. Cash advances. Many years ago, I did take a cash advance. This was before I knew much of anything about personal finance. I had no emergency fund and I left my low-earning non-profit job without a concrete plan. I just needed a few hundred dollars to get me by for a little bit, and I paid it back quickly. But the credit card issuer could have used this event to lower my limit, increase my interest rate, and lower my credit score.
8. Personal pampering. Marketplace suggests women refrain from charging visits to the spa on the credit card if they haven’t established a history of doing so previously.
9. Income taxes. the IRS allows you to pay your income tax bill via credit card. In fact, many people have recommended doing so if you have the cash to pay the bill in full when it comes due and if you can earn cash back or other valuable rewards by paying a large amount of money through credit. But a credit card company may interpret this method of payment as a sign that you can’t handle your financial responsibilities and may penalize you to prevent a larger loss if you default.
10. Alcohol. Drowning your financial sorrows at the bar? That is what the credit card issuers are likely to think if you start using your credit card in bars and liquor stores. Start making a habit of visiting bars and charging the drinks and you may raise a red flag.
While it’s unlikely that some Chase employee is poring over your credit card statement marking demerits for your porn, booze, gambling and spa vacations, the credit card companies have algorithms that detect these patterns automatically. Effectively, a computer program is making the “decision” that could result in your paying thousands of dollars more for your mortgage than if you just paid cash for these certain products and activities.
This article presents shopping habits as a direct influencer of credit scores. It’s bot. As you pointed out in a comment, your scores are affected by higher utilization. Credit card issuers may lower limits based on shopping habits. It’s an i direct process without any hard data.
This article is pretty dense. The very notion that a purchase can harm your credit shows absolutely no understanding of the credit scoring process. Technically, you credit score may worsen if a creditor decreases your credit limit there by increasing your overall utilization. If you have good credit and a bank jacks up your rate or decreases your limit without cause-end your relationship with them. You make them money with every swipe and they should reward you (as many cards already do)! High interest rates or risky purchases by themselves DO NOT affect your credit score!
They certainly do. Pattern purchases at certain locations affect how the credit issuers categorize you. Those categories result in changes to your account, because issuers use more information than just your credit score to determine your credit limit and interest rates. When an issuer reduces your credit limit because it sees you as a riskier customer, frequenting establishments associated with riskier borrowers, they report that reduced limit to the bureaus. Bureaus use credit limit information to determine your utilization ratio (or debt-to-credit ratio), and a higher ratio (the result of lowered limits) is a big factor in your credit score.
High interest rates can affect your credit score because people are more likely to have trouble paying their bills as rates increase. With difficulty paying the bills, there’s an increased chance of late payments, defaults, and a higher utilization ratio.
Thus, interest rates and shady establishments affect your credit score, indirectly, even though they are not technically “factors” in, for example, the FICO calculation. I think you already understand this. Of course “ending your relationship with them” — closing an account — can decrease your credit score even more! So that’s not always advisable.
Big brother is truly watching over everything we do…
People need to understand that credit card companies are some of the best at analyzing behavior through purchase history. There is a reason why you are rewarded for long histories with credit card companies on your FICO score. It’s a behavioral indicator. They have built up a phenomenal amount of data on you and can guess a lot of your preferences. For instance, I used to buy only Mobil brand gas in my area code because my parents sold Mobil. I also only flew with USAirways out of three of their hub cities where I or my family lived. All of it is used to target their marketing efforts to stuff you might like to buy. I buy Callaway Golf stuff for my dad for Christmas, next thing you know, I’m getting brochures for vacations in Myrtle Beach. Yes, they are spying on you to sell you things you might want too. Is that ok with you? I think phrased like that, most people are ok with it. (I am not, but that’s because I’m weirdly private that way.)
So more than anything, the credit card companies are looking at *changes in behavior* and to understand them. So what if I start buying a lot of Chevron after buying 99% of my gas at Mobil? That probably doesn’t say a lot about my changes in fortunes since gas is fungible, but shopping at Wal-Mart after years of shopping at Nieman-Marcus does.
I think it’s absolutely ok for companies to analyze your purchase this way to assess credit risk. They expect to be paid back and we all agree buy using cards to be periodically reassessed for our risk level. People are just sensitive to it now because it can represent a catastrophic cut in their limits.
What I do not think is ok, is for the government to ask for this information to go on a fishing expedition for terrorists and criminal behavior. I didn’t sign up for that at all. But there are probably other ways of doing data analysis and mining to get those results.
In direct reply to Charles Gervasi’s comment “If you don’t carry a balance, what do you need a very high credit rating for?” You need it in ways that have nothing to do with money. My insurance agent recently had to quote me renter’s insurance and she flat out told me because I had a very good credit rating she could offer me the best rate available. So yes, having a high credit rating goes beyond your relationship with traditional banking products. This was despite two homeowner insurance claims in 5 years on my condo. Thank my lucky stars that I had a great credit rating or else I might have had to pay a lot more for the insurance.
I still think making good money is infinitely more important than carrying out your life in a way calculated to please banks. If banks’ preferences don’t interfere with you making money and living your life as you please, I can see why it’s worthwhile to spend a little effort keeping them happy. My claim is that they have exaggerated their own importance. Some articles confuse pleasing banks with actually being financially successful (i.e. income, net worth, cash flow).
The last time I requested a credit score was about 10 years ago when I was finishing paying off debt I ran up in college. The score was 770. Since then I have not had debt and I have moved a few times, both of which the formula looks down on. I’ve built up my investments, which the formula doesn’t care either way about. I paid off my house, which the formula looks down on. If my goal were to have a high score, I would take out a modest amount of debt on a few loans of different types (mortgage, car loan, etc), pay it off slowly without moving it around from loan to loan, and I would try not to move house frequently and try not to do anything that requests my credit score. I believe this might result in me paying less for insurance. If for some reason I want to be in debt again, maybe I’ll try to massage it such a way that it increases my FICO score and saves me money on insurance and other things. Since I don’t have a reason to run up debts (I’m not opposed to it. I’ve done it in the past) at this time, I can’t see doing it just to get a better FICO score. This entire thing borders on a hoax perpetrated by banks to get you to buy their products.
Charles, I concur that the entire credit system has exaggerated its own importance. I don’t use credit, but had fun on CreditKarma finding out our scores of 638 for me and 758 for my husband. I like them looking good, but they haven’t yet served a practical purpose.
Just wanted to let you guys know that I just got done interviewing Dr. Robert Manning (as in 15 minutes ago), about the 2009 Credit CARD Act. Funny thing was that at one point he references this list of harmful credit card purchases and starts talking about it. I mentioned that we did a story about this list, got suspicious, I did a quick scramble to the internet and found out HE was the guy who helped compile the list of items in this Marketplace article that we’re all referring to. Go figure. Anyway, you can hear that interview on an upcoming Consumerism Commentary podcast! (plug) (plug)
I doubt the whole article. I know I did few of those thing mentioned and I did not see any change in my rates or credit history.
I shop at Walmart and even cheaper bargain stores (dollar stores, Big Lots, TJ max ect) all the time. I bought alcohol couple of times. I bought this in the actual liquor store not in grocery store.
I paid my wife’s traffic tickets on the credit card couple times.
Nothing has happened.
Having said that, I was actually thinking about this concept of profiling few months ago, for customer protection.
This is how it should work: If a customer never used the card for porn or liquor other “fun” items (say in past 5 years or ever on that card) and suddenly the transaction comes across, then the system should alert you (make a call or SMS, Text some thing) That would be helpful to every one.
Aarvee: I think your idea about alerts is a great idea. I wish more credit card companies offered that service.
As far as what you have seen personally, if you shop at Wal-mart all the time, it’s already factored into your credit profile. This article wouldn’t apply to you. It would only apply to people who have one pattern of shopping and then suddenly change their pattern.
First off I hate this sort of profiling, but that being said I wonder if it’s a simple filter like “pay taxes and you are a bad customer” or if it’s something that is evaluated as a whole. I buy absolutely everything with credit cards (and pay in full every month). I really do mean everything…it doesn’t seem to have affected my credit rating though.
It’s the negative sell. “Maybe our product (loans) isn’t for you if you do X, Y, or Z.” You’re supposed to say, “Oh no, I must have more loans.”
All they care about is getting people to use their product.
this is complete BS . lot those merchants might not even be identified by the credit card co software until someone calls the merchant and find out what services/products they are selling .
Manu: Most merchants are categorized when they sign the merchant agreement with their credit card authorization network. Some aren’t, but very few. This is how credit cards that offer cash back rewards know whether you’re buying something at a grocery store or a gas station — even a gas station convenience store — to apply the appropriate level of rewards. It’s not a perfect system, but you can be sure the credit card issuers are keeping their customers well-analyzed, at least in aggregate.
If you don’t carry a balance, what do you need a very high credit rating for? The things you mention are probably good policies to follow for our physical / emotional / financial health. It’s absurd to do them to improve banks’ opinions of us. I would be more concerned about how my colleagues and customers see me than banks. I could not carry any less whether banks agree or disagree with my purchases.
That’s a good question, Charles. There are many reasons you should do what you can to maintain a high credit score even if you don’t carry a balance. If you need to take out a loan to buy a house, or for a business, your credit score plays a significant role in determining how expensive the loan will be — or if you qualify at all. If you need to rent an apartment, many landlords will perform a credit check and deny your application if they feel you are risky. Some jobs, particularly those with financial responsibilities, perform credit checks and the employer will refuse to hire you if you otherwise qualify but have a mediocre credit report or score.
Do all these situations apply to everyone? No, but at least one of the above will apply to most people.
If true, we’ve given a lot of power to these people. I am still a little skeptical.
Mortgage – My understanding is if you meet the conforming guidelines at the time, everyone gets the same rate. Some brokers take higher fees and/or put less money toward buying down the rate, but that is not a function of banks scoring you higher/lower.
Other loans – What you say is totally true.
Renting an apartment – It’s possible a landlord might make a decision based on a score computed using a secret formula, but what she/he really wants to know is if this person pays his bills as agreed.
Clients / Employers – If you work in an industry where clients select their vendors/employees based on a secret formula, then I suppose you do have to live your life with banks’ opinions in mind. A goal should be to get away from these clients and employers because you clients/employers who are concerned with the value you actually provide will ultimately be better.
I totally agree some people are in situations where they need to think about banks’ opinion of their lives. Reputation in general matters. But I think banks have somehow managed to inflate the perceived importance of their opinion, as expressed through their proprietary formula, way beyond what it should be. Their formula, by the way, rewards people for using their products. It’s based on a) timely loan payments, b) outstanding loan balances, c) amount of time using loans, d) types of loans, and e) number of loans opened/applied for recently; i.e. using their product.
From my point of view, it borders on a scam. I actually doubt they care whether you go to spa or retread your tires. I suspect they just care about people using their products. I may sound paranoid, but it’s no worse than someone not going to the spa on account of these people.
Definitely a great list here. In the past, the one I’ve seen be the most harmful is definitely the lottery tickets. People get addicted to buying them, and things go downhill from there. Nonetheless, many of the others you’ve mentioned are also quite harmful to credit.
I agree, the conclusions can’t be accurate by those standards. A good friend of mine buys some of her clothes at Wal-Mart, and is beyond a millionaire. But don’t forget that when you have money, you don’t have a huge need for credit. You can buy whatever you want, wherever you want.
These are all very interesting points, but my guess is that their weight in the overall score will only be very minute or it will end up distorting it by a lot. Someone shopping at WalMart may just be thrifty and have good spending habits and so placing too much emphasis on that one factor alone will prove detrimental. You could say similar things about the other examples also.
Is there valid evidence that credit card companies are actually doing any of this? Or is this just speculation? I don’t see anything citing evidence they do any of this and theres a reference to Amex being “accused” of lowering credit limits for shopping at Walmart. Being “accused” of something doesn’t mean they do it.
How would a credit card company know i bought retreads? I don’t think credit card bills tell the bank what I bought, just how much was spent at the vendor. So a $200 charge from Tire Store, Co. doesn’t mean anything.
I’m not familiar enough with how someone would go about buying retreads. Truck stops? As far as AmEx goes, they’ve admitted the practice in letters to people who have been affected. This article in the Atlanta Journal-Constitution describes one customer’s experience.
Going back to Flexo’s comment in the article where he said he occasionally plays office pools when the payout gets huge. I also heartily endorse this idea, but for for social reasons. I played because not only do you stand a chance (albeit slim) of making mucho bucks, but because if your co-workers hit not only will you be left out of the windfall, you’ll also be forced to do all their work when they decide to take an early retirement.
Matt and PK: In some states you can buy lottery tickets with a credit card. I would have to believe it’s not a verry common practice due to the chance of fraud.
Okay since when can you buy lottery tickets on credit cards? It’s a cash only system as far as I know. Otherwise you could just buy a ton of tickets with a CC and just hope that you hit a payout large enough to pay the bill!
I’m not sure if this is true in all states, but I know that in Michigan and Indiana you CANNOT buy lotto tickets on your credit (or debit) card. I’m pretty sure this is to prevent theives from using stolen cards to buy lotto tickets, and then cash them in before they’re caught.
Funny, I live in Indiana, andplay the Lotto for the Fun of it… (I’m a systems Engineer, so I can afford the 20$/week 🙂 ) and I pay for the tickets every week with a Dept Card, but use the PIN code to do it… so I know you can, since I’ve bought the tickets and stores all over the place around here!
Thanks for reminding me this site exists. I haven’t looked at it much since 2009 (when this article was published). Glad to hear you can buy lotto tickets with a credit or debit card, good to know. 🙂
Call me crazy, but I don’t have a problem with any of this. Credit card companies are a business, and a huge part of that business is knowing who is most likely to default on their bills. If they actually have information on this, they should use this. I think there was a NY Times article on just this about 2 months ago.
That’s interesting and a bit alarming. Since I’m paranoid anyway, I wouldn’t dream of giving a credit card to a traffic court or the IRS. I would write checks for those. I buy top quality new tires, but I do shop at Target – not WalMart because we don’t have one. Porn or therapy have no place in our expenditures. If I had to choose one, I’d take the porn and pay cash. More worth the money, probably 😉 Alcohol is food, bought now and then at the grocery or drug store. We don’t borrow money and rarely get cash from a debit card, but we use debit cards as though they are credit cards. I don’t think we’d raise red flags with those who want to watch our every move.
The principal behind this is astounding. We are becoming such a “nanny” state. Now credit card companies are monitoring what people spend their money on? Credit card companies need to stop finding new ways to screw over their customers and start serving them. What a concept.
I’m not sure that I agree that this is a “nanny state” issue: it’s private business (to the degree that the banks are, indeed, “private business” any more), and part of serving their shareholders means ensuring that their assets are going to be repaid. At the end of the day, the money used when you weipe a credit card belongs to the bank (and its shareholders) until it’s paid back, and I think they have every right to decide where that money gets spent. If a customer doesn’t like a particular bank’s policies (which I think should be made public), they’re free to find someone who will lend them money for their purchases, and charge them based on the risk.
I agree with this, but if you spend 33% of your limit at the liquor store, and still pay your credit card bill at the end of the month? Does that make you a irresponsible debtor?
The IRS charges you a fee to pay your taxbill on your credit card. Something like $125 dollars – can anyone verify this? I know it’s nominal, but painful nonetheless.
It’s much better to make a payment plan with them and mail them a check for a fixed amount once a month.I did that and they accepted it.
And who buys lotto tix with a credit card??? The guy on the corner buying scratch offs has a credit card?
So the rule is: Pay cash for all your fun stuff.
The one thing I don’t get here is that the bias shown by credit card companies doesn’t seem to take into consideration that some people may prefer using credit cards in lieu of cash. That could be for a variety of reasons, be it that someone is trying to take advantage of reward options on their card or simply that they don’t want to carry cash around with them.