Open Secrets: Surprising Things Your Spending Reveals
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The chrome skull shift knob that I gleefully replaced the original shift knob with on my 1998 Mazda 626 several years ago has quite a story behind it. I had wanted one for ages, particularly since it would be such an incongruous detail on my boring car, and my husband bought and installed one for me to get himself out of the doghouse. He knew that an ironic skull shifter knob would go over much better than the traditional flowers.
What a Chrome Skull Shift Knob Says About Me
But the fact that he bought that chrome skull accessory with a credit card is enough for J.P. Martin, a former executive of Canadian credit card and retail giant Canadian Tire, to assume that my husband would be at a higher risk for missing credit card payments. That’s because Martin was one of the pioneers of data mining: the gathering and analysis of information about consumers based upon (among other things) their spending patterns and habits.
For example, J.P. Martin’s data showed that consumers who bought things like felt pads for the bottom of their furniture, carbon monoxide detectors, and birdseed were extremely diligent about always paying their bills on time. Why do these purchases matter? Because they can give some insight into the psychology of the purchaser. In the case of felt furniture pads, someone who cares about protecting his hardwood floors is also someone who is likely to want to protect his credit score. Carbon monoxide detectors and birdseed indicate a sense of responsibility for others—why else pay to feed birds you don’t own?
And of course, things like chrome skull car accessories and other after market car additions generally indicate someone who does not necessarily buy into the importance of financial responsibility—although that was certainly not true in my case.
While banks vehemently deny that they use data mining to make any changes to a cardholder’s interest rate, credit limit, or other aspects of their account, the information is readily available to banks and card issuers, and gathering, analyzing, assessing, and selling that data is perfectly legal.
Tracking Big Life Changes Is Big Business
In particular, credit card issuers and retailers want to know if you are going through a major life change.
For example, many people have now heard the anecdote about how Target was able to determine that a teenage girl was pregnant before her father had a clue. As Charles Duhigg reported the anecdote in the New York Times (and again in his book The Power of Habit), Target’s pregnancy-prediction model is able to use any shopper’s buying habits to figure out she is pregnant. In one case, an angry father of a teenager complained to his local Target that the store had sent her coupons for baby-related items. He came to find out later that his daughter was, indeed, pregnant, and had simply not told him yet. Target knew he’d be a grandfather before he did.
Some Life Changes Make You a Better Customer
Why does Target want to be able to send pregnant women coupons for cribs and onesies? Because major life changes often lead to major spending changes, as well. In particular, a new mother is poised to spend a great deal of money over many years, and during her pregnancy is the ideal time for retailers to earn her brand loyalty.
According to Duhigg, Target uses information gathered through loyalty cards, coupons, and credit card use in order to paint a picture of each shopper in order to target (ahem) advertising and coupons. Duhigg believes that this practice helps explain Target’s incredible growth over the past decade—from $44 billion in 2002 to $67 billion in 2010.
Similarly, banks will comb through your data to determine if you have recently moved. Moving is an ideal time to market to cardholders, and banks will want to know as soon as possible so that it can alert its marketing partners—like home improvement businesses.
And Some Life Changes Make You a Poor Credit Risk
Of course, not all life changes are as happy as the arrival of a baby or the purchase of a new house. Credit card issuers are very interested in determining when a cardholder might be going through a divorce. Not that banks are interested in your romantic life per se; it’s just that divorce is often a precursor to major financial troubles. So credit card issuers want to know what behavior is likely to indicate your marriage is on the rocks and if you might start missing payments.
What kinds of information indicate future divorce-related financial problems? Anything from a shift in buying habits—like switching from a high-end department store to a cost-conscious Dollar Store—to charging a session of marriage counseling on your credit card. When these changes occur, your card issuer may be interested to know and keep an eye on your account—although it is important to once again point out that credit card companies deny making any decisions or changes to cardholder accounts based on data mining.
What Else Are They Doing with Your Data?
While the use of data mining in managing the various risks of the credit card industry is not something that banks are going to openly talk about, there are a few indications of what this data mining is used for, other than promoting products.
For instance, the Wall Street Journal reported in 2009 that American Express was offering certain cardholders $300 to pay off their remaining balances and close their accounts. Clearly, the credit card company felt that paying these individuals to voluntarily close their accounts would be the least risky option; a decision they presumably came to after examining the information about those cardholders’ spending and payment patterns.
But the data available through your credit card usage is not just useful to the credit card industry itself. Insurance companies are also interested in your buying habits. For instance, The Economist reports that “people who frequent ATMs so they can make cash payments tend to live longer than those who prefer writing cheques or paying with credit cards…Why this should be is not clear: some speculate that ATM users tend to be more spontaneous types, who like to have cash in their pocket and whose lifestyle may be more active.”
Kevin Pledge, a data analyst with Insight Decision Solutions, takes the insurance industry’s interest in purchases to a somewhat paranoid level: in the eventuality that data miners (and insurers) take a look at your food purchases, he has given up using his loyalty card to buy junk food at grocery stores and pays for his burgers in cash.
The Bottom Line
Mr. Pledge’s paranoia may be justified. The fact of the matter is that your information is available to data miners, and privacy law will take some time to catch up. Until then, banks and other industries will continue to take advantage of the enormous amount of data available—to sell to you, to assess your riskiness, and to tailor their services to your needs. Being aware of this practice is the first step in making sure it doesn’t bite you in the butt.
And here’s hoping that the data miners and the companies who rely on their results recognize an important chrome-skull shaped truth: there are always exceptions to the rules they find in the patterns of our buying.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any bank, card issuer, airline or hotel chain.