The next time you apply for a credit card, your credit report and income will be only a part of the criteria used to determine your creditworthiness. For that matter, as long as you have the card, what you use it for will be noted and added to a growing set of data that makes up your psychological profile, which will then be referred to every time the bank deals with your or reevaluates your risk as a customer.
The New York Times Magazine takes a look at this new method of determining credit risk, pioneered by Canadian Tire executive J.P. Martin about 6 years ago.
Martin’s measurements were so precise that he could tell you the “riskiest” drinking establishment in Canada – Sharx Pool Bar in Montreal, where 47 percent of the patrons who used their Canadian Tire card missed four payments over 12 months. He could also tell you the “safest” products – premium birdseed and a device called a “snow roof rake” that homeowners use to remove high-up snowdrifts so they don’t fall on pedestrians.
It’s not just that what you buy reflects your socioeconomic level and current financial status, however; what Martin did was take the raw data and tease out personality traits that explained the the purchases while predicting future behavior.
Why did birdseed and snow-rake buyers pay off their debts? The answer, research indicated, was that those consumers felt a sense of responsibility toward the world, manifested in their spending on birds they didn’t own and pedestrians they might not know. Why were felt-pad buyers so upstanding? Because they wanted to protect their belongings, be they hardwood floors or credit scores. Why did chrome-skull owners skip out on their debts? “The person who buys a skull for their car, they are like people who go to a bar named Sharx,” Martin told me. “Would you give them a loan?”
Lenders have been using this sort of data mining ever since, but until recently they’ve kept it on the down-low to avoid triggering any privacy fears from customers. Now, with billions of dollars of losses from formerly profitable customers (i.e. the slightly risker ones) who suddenly can’t pay, the lenders are using their psychological data not only to screen for the “right” sorts of customers but also to try to convince the bad ones to pay off their debts.
There’s another reason for this, too: it helps build a stronger relationship with the customer.
If a credit-card company detects unsettling patterns, it might start cutting credit lines, raising interest rates or accelerating repayment schedules. (Companies are expected to withdraw $2.7 trillion of credit by the end of 2010, according to a March report from the Meredith Whitney Advisory Group, a banking-analyst firm.) But the most useful information the card companies are deriving from their data are the insights that help them deepen their relationships with customers, particularly when a cardholder is going through a rough time. One of the strongest conclusions of the psychological studies is that cardholders are most likely to pay the bills of those companies with which they have an emotional connection.
“What Does Your Credit-Card Company Know About You?” [New York Times Magazine]