A strip club and a marriage counselor: What do these two things have in common (aside from the fact that a trip to the first may result in a trip to the second)?
They're both places where you should never, ever use your business credit card. Here are some others: bars, massage parlors, discount stores, pool halls, pawn shops, and tire retreading services.
Use plastic to pay in any of these places -- or places like them -- and there's a chance that the card issuer will cut your credit limit, raise your interest rate, hike your fees, or cancel your card altogether.
That's exactly what happened to Kevin Johnson, founder of Johnson Media, a digital marketing firm in Atlanta. Not long ago, he received a letter in the mail from American Express informing him that the credit limit on his card had just been cut from $10,800 to $3,300.
Why did this happen? "In effect, the letter said I was shopping at places where people with bad credit shop, which means that I too am a greater risk," Johnson said. "Business owners like me are getting the short end of the stick. This is a problem that's getting worse and worse."
The Secret Is Out
All credit card issuers keep close track of your credit score. You knew that. They also keep a "behavior score" on you, which you probably didn't know. That's because banks don't like to talk about their use of behavior scores.
In response to an inquiry from AllBusiness, both American Express and Capital One said they don't adjust credit limits based on where customers spend, and that adjustments are typically based on debt-to-income ratios. But people who watch the industry have been talking about behavior scoring a lot lately (in articles with titles such as "The Secret Is Out"), and what they describe is a little creepy -- and more than a little annoying.
Your behavior score is just what the term implies: It's the bank's judgment of what sort of person you are, as depicted by your spending habits. And if your spending habits include, say, visits to a psychotherapist and secondhand stores, your bank may decide you're not the sort of person who's a stable credit risk.
Virtually all large credit card issuers in the United States keep behavior scores on their customers. A 2010 survey by the Federal Reserve indicated that issuers review around 35 million cardholders each month based on their spending behavior.
The same study showed that a small percentage of the cardholders whose accounts were reviewed had their credit lines cut. But cutting your credit line is only one way a card issuer can squeeze you if it thinks your behavior makes you a poor risk. It can also raise your interest rate or your annual fee, or it can simply cancel your card. A low behavior score could also make it more difficult for you to get a loan in the future.
Behavioral scoring is a fairly new phenomenon. But why is this happening, and why now? Joseph Paretta, author of Master the Card: Say Goodbye to Credit Card Debt Forever! (Balboa Press, 2010), says it has everything to do with the unstable economy.
It's no secret that credit card companies are faced with growing delinquency rates. They're desperately searching for new ways to lower their risk and raise their profits. "As the economy hit the skids in 2008, more and more credit card companies are starting to look at ways to be more careful about to whom they offer credit and what those credit limits should be," Paretta said. "Behavior scoring wasn't a big issue before the financial crisis. But now it has become a real factor for the credit card companies."
The practice may be legal, but is it ethical? Have card companies crossed the line by making judgments about you and your business based on where you shop? The Federal Trade Commission seems to think so.
In 2008, the FTC filed suit against credit card issuer CompuCredit for deceptive marketing practices. One of those practices: not properly disclosing to consumers that they could be punished for certain kinds of purchases, including those made at bars, billiard halls, and tire retreading shops. CompuCredit later settled the suit by agreeing to pay more than $114 million in refunds to consumers.
What's Good Behavior? Banks Won't Say
What can you do to improve your behavior score? You can use your common sense and avoid paying with your card at places that might suggest you're anything less than a perfectly normal, upstanding citizen with a rock-solid financial profile.
But your behavior score isn't like your credit score. There are no sure steps you can take to improve it because issuers won't tell you what it is, let alone the methods they use to compile it. You could cut back on your credit card purchases in general, but your bank may also interpret that as a sign that you're under duress.
So what's a small business to do? "Use your card prudently in places that you would be happy to have your mom know you are patronizing," said Frank Gorman, executive vice president of commercial banking for Meridian Bank, a community bank that doesn't issue credit cards. "And avoid places that can raise a red flag like nightclubs and casinos. Even avoid retread and discount shops. Those kinds of places can lead to lower credit limits."
Gorman added that business owners should also resist the temptation to use their business cards for any kind of personal or discretionary spending. "Everything purchased on the card should absolutely be for business purposes."
It's annoying to know that your credit card issuer is, in effect, following you around and judging your behavior on a regular basis. But with database technology improving daily and computing power racing ahead, it's inevitable. You'll just have to get used to it.
And next time you go to Big Lots, be sure to pay with cash.