What do old school credit card lenders know about you?

Every time you make a purchase on a credit card or debit card, unlike the consumer finance or BNPL transaction, a record of that transaction is logged into a database of information collected by your credit card issuer. It is a common industry practice to analyse the data for trends.

In exchange for the convenience of using plastic, consumers trade up to something some people hold tight — privacy. Many privacy experts warn that consumers should be mindful of what they buy with plastic. How much do credit card issuers know about your purchases? What can they legally do with the information?

Privacy first 🕵️‍

Obviously, that is something that most credit cardholders are not going to think about. Once we obtain a credit card, one thinks that now can go out and use it in any way they like. Have you used your credit card at merchants specializing in second-hand clothing, rethread tires, bail bond services, massages, casino gambling or betting? Your credit card issuer may be taking note — and making decisions about your creditworthiness based on your purchasing behaviour.

The reason: Buying used clothing or retread tires may be an indication of financial distress and a preamble to missed credit card payments or defaults.

Increasingly, issuers tightening lending standards are using purchasing data as a basis for increasing interest rates, reducing credit limits or both on customers considered riskier by virtue of where they shop or what types of goods and services they buy.

Experts say cardholders concerned about keeping purchasing habits private or avoiding credit score dings should consider using cash or gift, stored value or prepaid debit cards.

Conclusion: “Cash is the ultimate privacy protector. But avoiding credit cards for the sake of privacy may present a quandary for some users: If they had the cash to pay for an item, they wouldn’t need a credit card. For others, the convenience of using a credit card over other payment methods far outweighs the potential privacy concerns.

Mining for data

Known by a number of terms in the industry, including behavioural modelling, data mining and psychographic behaviour analysis, the practice of mining internal credit card issuer databases for customer spending trends and other patterns is not new. Issuers have been analysing data perhaps since the first credit cards were issued.

Here’s a sample of the electronic payment tracking codes assigned to different types of merchants:

  • 4900 Bail and bond payments
  • 5300 Wholesale clubs (Costco, Sams, etc.)
  • 5411 Grocery supermarkets
  • 5532 Automotive stores
  • 5698 Wig and toupee stores
  • 5813 Drinking places (bars, nightclubs)
  • 5814 Fast-food restaurants
  • 5912 Drugstores and pharmacies
  • 5921 Packaged beer, wine and liquor stores
  • 5931 Used and second-hand stores
  • 5933  Pawnshops
  • 5944  Jewellery, watches, clocks and silverware stores
  • 7251  Shoe repair shops
  • 7273 Dating/escort services

The issuing bank has the date of transaction, name of the merchant and the amount of the transaction that allows them to process that transaction. However, the specific information about items purchased (that you bought a a frozen pizza and shampoo) is not included in the data transferred from the merchant. So far only few start-ups have been successful with digitalizing receipts, such as our UK fellow Flux.

Keeping track 🐾

We have identified four key reasons why banks do track customer transactions, and here they are:

  • Marketing. Issuers use past purchasing patterns as a basis for offering additional products. Someone purchasing airline tickets with their credit card may get offers of airline rewards credit cards or travel-related services from the issuer or an affiliate.
  • Fraud detection. Credit card companies monitor spending to detect unusual purchasing habits that could be red flags for fraud and crime.
  • Risk management. Card users who continually go over their credit limits or exhibit unusual spending habits — such as charging large amounts of merchandise on a card they had previously rarely used — may be at greater risk of not paying their bills or filing for bankruptcy.
  • Law enforcement. Remember that TV crime show where police tracked a missing person and a killer using credit card transaction data? Such information may be helpful in determining the last known location of a crime victim or suspect.

Massive databases of information 💾

Millions of credit card users receive monthly statements detailing their spending during the billing cycle: The standard information provided includes the date of purchase, the place of the purchase, including the name of the merchant, city, state, amount of the purchase and a transaction reference number.

Every transaction processed by the card networks (Visa and MasterCard) is assigned a merchant category code (MCC), a four-digit number that denotes the type of business providing a service or selling merchandise.

The MCC for pawnshops, for example, is 5933. For dating and escort services, it’s 7273, and for massage parlours, it’s 7297. The MCC is used, for example, to restrict health care spending on healthcare-related credit and debit cards. Some health care flexible spending accounts allow users to make purchases only at pharmacies or merchants with medical-related services. Small business owners also use the codes to prevent employee abuse of company credit cards.

The MCCs, along with the name of the merchant, give credit card issuers a spyglass into cardholders’ spending.

Overall 🌎

Credit card issuers have access to a wealth of information about where you shop, how much you spend and how often. Increasingly, they use that data to change your access to credit. It’s not only your retail purchases but your online purchases. It can really paint a very complete picture. The stores that you shop at can paint a picture. You also may use it at a doctor’s office if you pay for care with a credit card. Some people pay for their utilities with credit cards. Thus, it might be wise to consider other options available on the market, such as independent consumer finance companies, BNPL options or…JO1N!

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To discuss our solution call us Monday to Friday, 9am - 5 pm, 07474 235 856
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