This won’t surprise holders of cash back rewards credit cards, but the companies that issue your credit cards know where you shop. Issuers who follow their own guidelines need to know which purchases qualify for 1%, 2%, or 5% cash back, so each retailer is categorized. The purchase analysis doesn’t end with categories, however; issuers collect precise detail about your spending. When that detail indicates you might be at a higher risk of defaulting on your credit, the issuers can quickly take action, like lowering your credit limit, raising your interest rate, or canceling your card entirely. The latest regulations can’t do anything about it.
You should be aware of this because of the possible downstream effects. Lowered credit limits, with all other things being equal, will negatively affect your credit score. With a significant downward change in credit score, you could have trouble qualifying for the best mortgage interest rates or trouble qualifying for credit at all. A lower credit score can cost tens of thousands of dollars over the life of a mortgage.
The goal, for anyone concerned about the long-term effects of a less-than-optimal credit score, should be to reduce the chance of being labeled a risk. And for credit card users, that means becoming financially literate and shopping with retailers who are not associated with risky behavior. Issuers are carefully watching — using computational algorithms and automated systems — where you shop. If your spending pattern changes and you increasingly become a customer of locations identified as high-risk, your credit card account may be flagged for a higher default risk, even if you have excellent history paying your bills.
Be Careful What You Put on Credit
Don’t use credit cards for several types of purchases, suggests the American Public Media Marketplace. There is evidence of purchases like this directly affecting customers’ risk profiles.
1. Pornography, adult toys, and strippers. A general rule of thumb might be not to use your credit card for purchases you wouldn’t want broadcast on the front page of the New York Times. Based on the immense collection of data issuers have on spending, these types of purchases are common among people who going through difficult financial situations and are looking for some kind of escape. In general, according to issuers’ data, people who use credit cards in strip clubs or adult toy stores have a higher risk of default. As a result, the individual who conforms to this category is affected even if he or she does not pose a greater risk. Bachelor and bachelorette party goers beware — particularly if you make a habit of attending these functions.
2. Cash advances. Plainly, cash advances are signals of, among other things, financial trouble, financial ignorance, or gambling debt. With a cash advance from your credit card, you’re telling the issuer your income and savings are not enough to cover your expenses and you have no other sources of financial help. Even borrowing money from family would be better than taking a cash advance. If you’re using expensive borrowing to fund a gambling problem, issuers are justified in their identification of you as a credit risk.
3. Alcohol. Like porn, alcohol can be considered escapism. A cardholder whose behavior changes and begins shopping for alcohol more often — whether in liquor store or bars — will raise a red flag in the issuers’ systems. An increase in alcohol spending could signal financial problems, as the unemployed and the broke may be more likely to drown their sorrows.
4. Lottery tickets. Playing the lottery for fun, with no expectation of winning, is not harmful. When the potential jackpots are large enough to start making the news, more people join in the game. Just avoid paying for the lottery tickets with credit cards. Doing so might give card issuers a reason for believing you are playing the lottery because you believe winning is your only hope for financial independence.
5. Discount stores. When your shopping patterns change from high-end groceries to national discount retailers and dollar stores, you can be sure that the credit card companies take notice — or their computers do. Even if you change your behavior simply because you’ve adopted a more frugal spending philosophy and are enjoying the increased savings account balances, issuers might be concerned that your income has dried up. Rather than call you to find out whether your situation has changed, it’s much easier for issuers to make assumptions and decisions based on those assumptions.
Use Cash as an Alternative
There are more high-risk purchases that could harm your credit if you systematically — or in some cases, rarely — use your credit card; paying mortgage bills with a credit card is one example. Issuers and credit bureaus collect an enormous amount of data about you and your spending habits, and the massive databases that store your purchasing habits are legal. If you want to avoid scrutiny, whether for the sake of your credit score, for your privacy, or for your reputation, the solution is simple: use cash.
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