Hey, people who know about laws and money and stuff: can they do this?

I have an American Express card onto which I transferred a balance with one of those 3.99% APR forever deals. I pay a couple hunge each month. For the past few months, every time I send them a payment, they then send me a letter saying they've carefully reviewed my credit blah blah and they're lowering my available credit to [slightly above what the balance is at the given time]. No biggie; the purchase rate is some godawful 17% or something, so I'm not fixin' to charge anything to it any time soon. I'm just enjoying the low interest rate.

I had been kind of wondering whether it was worth their time and money to review my credit and adjust my account and all that stuff every month, particularly when I have a card with terms that make it really unlikely that I'll use it.

Also, my credit score is in the 700s. I do have a fair amount of debt, but I've never had a late payment on anything in my life, I own a house with decent equity in it, and I have tons of unused credit. I'm guessing that they're changing their guidelines along with the credit crunch, but again, I'm hardly a credit risk, and again, is it really worth their time and money to lower my credit line by $200 every month?

OK, so here's the thing that really threw me. This month, when they sent me said letter, it listed a bunch of reasons why my credit isn't good enough. There were the usual "too much debt" and "ratio of debt to available credit is too high" (which I've always suspected is a more complicated equation than a "ratio," since I'm using barely any of my available credit).

There was also a bullet point that said
  • The credit risk associated with customers who previously had residential loan(s) with lender(s) as indicated in your credit report.
Wait, what? They're basing my credit on the actions of other people who've used the same mortgage company(ies) as I have?! Even though I've never had a late payment on my mortgage? How is that legal? I thought that credit decisions had to be based on one's actual history, not by any sort of profiling. Are people also allowed to deny me credit if I start shopping at Fingerhut or Rent-a-Center or other places notorious for bad debts, even though I have a good credit history? Wouldn't that constitute discrimination?

Based on what I know of financial laws (not much), I'm guessing there's some sort of loophole that allows them to profile people like this. Does anyone have more info?


Jodie said...

My understanding is that they can discriminate in any way that they want, as long as it's not by one of the federally protected classes like race and religion.

This story may give a little idea of why they're doing that: http://www.washingtonpost.com/wp-dyn/content/article/2008/12/17/AR2008121703348.html

The proposed regulations that are coming up are going to make it harder to charge interest and make money, which means that when some people do default there's less money in their pocket that's making up the difference. So if you spend extra credit, it's going to be harder for them to charge you more, plus there's always the fear that you too could default if things get bad enough. Even though you haven't defaulted and haven't given them a personal reason to think that you would, with the way things are going it's not an outrageous leap for them to be concerned that anyone who has debt is going to get into more debt before it gets better. It's not fair, but it's not unlike a lot of the other risk assessment that goes on in say, the insurance industry- which is the way a lot of companies are beginning to think in these hard times.

eeka said...

Yeah, you're probably right that they can do anything they want as long as they stay away from protected class issues. I tend to forget that regulations for insurance and loans seem to be more of a free commerce line of thinking (i.e., they can choose to do business or not do business with whoever they want). It just throws me because there are always stories about lenders discriminating and whatnot (which I'm sure happens), so I tend to think of it as being as regulated as, say, housing or employment, which we tend to view as something all people have a right to have, instead of something to be purchased.

Yeah, I saw that article. Some of the stuff makes sense, but others, like requiring lenders not to jack up interest rates when someone misses a payment? Seems to be a pretty clear-cut term that you agree to. I'm very aware that my really-low-interest American Express card will get jacked up if I don't pay on time. If it got jacked up, I'd be really pissed off, but I wouldn't try to say they took advantage of me or misrepresented the offer or anything.

Bob (Highland St) said...

Recently, credit card companies have become aggressive in pulling back credit. For example, they're also closing unused accounts. This is probably a good thing, in the long run.

Discriminating based on your lender may not be so far-fetched either. Some lenders specialized in exotic sub-prime mortgages. Amex might be afraid that your mortgage is variable rate, and could "reset" soon and cause a foreclosure (as well as a credit card default). If they can't see your actual mortgage terms, denying credit to people with mortgages from companies that specialized in exotic lending would be a way they can protect themselves against this.

Jodie said...

They can still raise your interest rate for missed payments, but other credit cards can't- so if you miss paying Citibank, Bank of America can't raise your rates with them. Considering that they don't have to wait until you are 30 days past due before doing this- like, if you pay on Tuesday when your payment was due on Monday, I think that's a good thing. I hate the idea that your interest rate can potentially go up on all your cards just because it's not really intuitive to keep track of 25-day billing cycles. It was really different back in the day when people got paid every week and knew that their credit card was due the 3rd week of the month, you know?

Of course, it would be far better if we'd all stop getting in over our heads with debt. That's my financial dream for myself...