An interesting article over at MSN Money made me think a bit. The article, Your lifestyle may hurt credit score – MSN Money talks about how the FTC is pursuing CompuCredit for ‘deceptive marketing practices’ because they monitored not only the payment history but the purchasing history of the card holder.

At first glance, this sounds like a whole new level of invasion of privacy on behalf of CompuCredit, but if you stop and think about it a bit, isn’t that what all the credit card companies do (by extension)? Sure, currently credit card companies can raise your rates if you miss payments. And there’s also the dreaded Universal Default which can trigger increases on cards other than the one you missed the payments on. They can and do track your spending, and can easily tell when you go on spending sprees. The difference here is that CompuCredit has done something proactive about it. The reason they’re in trouble is that they have raised rates and curtailed credit limits based solely on the spending habits of their customers. That’s a step farther than most card companies have been going. The reason they’re in trouble is they didn’t disclose the practice to the customer. Not that the DID the practice, but they didn’t TELL the people it would happen.

Can You Afford the Lifestyle of the Rich and Famous?

Too many people use their credit cards a supplement for their lifestyle, living the ‘good’ life and putting it on plastic. The part where most people get into trouble is living beyond their means. As Dave Ramsey is fond of saying;

“If your income is less than your outgo, your upkeep will become your downfall.”

Living beyond your means is the double-edged sword that credit card companies love. On the one hand, if you continually spend more than you make, you run up the revolving credit amount, which equates to more interest (and profits) for them. But on the down side, if you run up too much, you’re likely to default and either stop paying (causing litigation) or declare bankruptcy (forcing a write-off by the companies). It’s in their best interest to ‘manage’ you and make sure that you’re in their ’sweet-spot’ of spending; More than you make, but less than you can afford to pay in minimum payments.

CompuCredit specialized in sub-prime lending, meaning their credit cards targeted the riskier spenders, and carried a correspondingly higher interest rate. More risk, but more reward. To make sure they were actually making that necessary profit, they took the additional step of being proactive about watching their customers’ spending habits, and modifying the credit limits accordingly. If Joe Irresponsible suddenly goes out and spends $5000 in a week, where in the past he’s never spent more than $500, that might be signs of something brewing.

The part where they got in trouble (according to the report) is in the marketing of the card. They didn’t tell the customers that spending habits would adversely affect their credit, and that’s what they’re in trouble for.

Singling Out the Weakest in the Pack

It isn’t unusual for the credit card companies to monitor purchases. I can remember when I was younger and just starting out, I purchased some plane tickets, and a new bicycle ($700, I was really into cycling then) on the same day. Even though I was nowhere NEAR my limit, I still had to have a 15-20 minute discussion with the credit card company at the bike shop explaining why I was running up a couple thousand in purchases on the same day. They were being proactive in making sure the purchases were legit. In this case it was related to fraud, but it’s not such a big jump to considering purchases and relating it to normal spending habits.

Credit card companies can reduce their risk by keeping an eye on consumers that start suddenly living FAR above their means. This can be a sign of many things; Plans to default on payments (via bankruptcy for instance) and fraud, just to name a couple. If the card companies lose money, it eventually gets paid for out of our increased fees and interest rates, so in one way, it’s a benefit to the larger, more responsible credit card holders.

Do you think it’s right that credit card companies monitor your purchases? Leave us a comment with your opinion!