NEW YORK (TheStreet) — A Federal Reserve study has revealed that a handful of credit card issuers have used transaction-profiling in making decisions about credit limits and interest rates of cardholders.
The study shows these issuers used this behavior modeling to gauge a customer's risk of defaulting on credit card loans. The Fed didn't disclose the companies in its report.
The report was part of the CARD Act, which required the Fed to investigate whether credit card companies engaged in these practices any time between November 2006 and November 2009.
Of 175 banks and lending institutions surveyed, six used one or more of these practices as a basis for adjusting credit limits, raising rates or making closure decisions on active accounts during the three-year period.
Of the 25 largest credit card issuers surveyed: Two considered the type of credit transaction in a decision about rate increases; four considered the type of credit transaction when regarding account closures; and five considered the type of credit transaction to make decisions about reducing credit limits.The survey also identified several additional practices that relate to a cardholder's transaction activity including:
Cash advance activity: Some issuers used cash advances as an indicator of risk. One issuer indicated that, for some of its new cardholders, it monitored cash advance activity in conjunction with card purchases at certain type of merchants (for example, jewelry and electronic goods stores). According to this issuer, it has found such behavior among new cardholders to be an early warning of elevated credit risk.
Transaction velocity: Issuers indicated that unusually high transaction velocity (number or dollar amount of transactions in a given period) or even a change in velocity may reflect cardholder behavior that is indicative of elevated credit risk.