Credit card companies change formula

Consumers teetering between good and bad credit might find themselves with unfavorable -- even unbearable -- interest rates as card companies use new risk factors to decide who gets the best offers.

Card issuers that previously relied heavily on credit scores as the barometer now look at a broader picture of intangibles that include where a person lives, their employment and where they shop.

That means someone with an acceptable credit score and a few credit cards might suddenly see their interest rates skyrocket or not get the lowest rates on a mortgage simply because they live in an area of high foreclosure rates or work in a sector that's at the economic precipice, such as real estate, according to analysts.

"The cliff effect is changing where the cliff is located," said Olivier Garret, CEO of Casey Research, an independent financial research firm in Stowe, Vt. "Many card-issuers are trying to sell off their portfolios and very quickly need to lower their risk and want to rid themselves of those things that might make it unattractive."

Some card issuers are faced with increasing delinquency rates among their clients -- Capital One was at nearly 8 percent at the end of 2008 -- forcing them to look more closely at each client's individual risk.

Banks, however, aren't saying what goes into their financial decision-making after the credit scores are factored.

Using factors outside the norm is distressing to those who work hard and live within their means -- even if it's a neighborhood issuers might flag as risky.

"I chose to live in an area that I could afford in a sensible manner," said Jeff Golden, a 49-year-old surveyor from Aurora, Colo., who's career relies on the foundering construction industry.

"I bust my butt and have a damn good credit score. My neighbor's inability to pay his mortgage is not reflective of my ability to pay mine," Golden said.

How you use your credit card not only says a lot about you, but tells the issuer of the card much more than you might want them to know.

For instance, a change in buying habits -- shopping at discount stores more frequently than in the past -- could flag upcoming troubles with your finances, said Emily Peters, a financial expert at Credit.com who formerly worked at credit reporting agency TransUnion.

"This is more about existing customers and what the card companies can do to mitigate the risk of their customers," Peters said. "That's why we're seeing so many account closures and interest rate increases, things that were unheard of just a few years ago."

Cardholders are wrong to think their purchases are private, experts warn, and every transaction they make is there for the card issuer to evaluate.

So buying used clothing or shopping at a value store can be a bad thing if you were a high-end shopper in the past. And living in states hard-hit by the foreclosure debacle might flag you as an added risk.

Even your place of employment can work against you, Garret said.

"Carpenters in the housing industry, for example, are a red flag now since there is a very high chance they will be unemployed," Garret said. "If you work in the auto industry or even buy your household necessities at Wal-Mart, you might be a target."

Much of it is driven by the amount of debt consumers continue to carry and the increasing number of them who can't even meet the minimum payments, Peters said.

At the end of 2008, the average credit card borrower had a balance of $5,710 with a minimum payment averaging $230 a month.

With the average APR at 13 percent, it would take 30 months to repay it and cost nearly $1,000 in interest, Peters said.

"People in the past decade were used to easily getting credit affordably and they could get it at almost anytime with any score," she said. "That's all crashing down and people are shocked. And it's not only damaging their finances but their credit score."