Think you'd like to save a few bucks on your next set of wheels and maybe buy some retreads? Maybe unwind a bit with a cold one at a local nightclub or shoot a few games of pool at your local billiards hall? Go ahead, but do so at your peril. You may end up ruining your credit.
A little known but widely used practice has come into the spotlight as a result of the mugging that specialty finance firm CompuCredit
Under the microscope
It's a ubiquitous practice, used by MasterCard
Admittedly, some of this sounds pretty creepy: Who are they to judge us by where we spend our money? True, but it also makes a lot of sense. Despite the appearance that your local tire shop and Herbalife distributor are being thrown together with a bunch of seamy go-go bars, massage parlors, and pawn shops, there's some science behind it which shows that if you're running up your credit card bill at a lot of these places you become a higher risk.
In CompuCredit's case, it makes even more sense to conduct such modeling. The company specializes in extending credit to individuals at the low end of the FICO score range. These are people who have no credit or poor credit and may have been denied credit by other card issuers because of previously not paying their bills, filing for bankruptcy protection, or other high credit risk actions. The cards are issued with a small credit line and oftentimes allow the consumer to rebuild his credit score.
If that person is using the card at such establishments, it seems pretty certain they haven't quite learned the appropriate use of credit or that their risks may be rising again. Divorces, for example, are a credit-ruining event by themselves, and someone paying for counseling with a credit card is revealing a relationship that's on the rocks. Running up a card during such stressful times and leaving the other party with a high debt bill is not uncommon.
Similarly, regularly using credit to pay for your beer at the corner tavern or even your morning coffee at the local Starbucks may indicate that you don't have the cash to pay for even basic purchases. That could be a sign of financial trouble.
Foolish financial fitness
While most people think of their FICO score as the one score used to judge creditworthiness, there are hundreds if not thousands employed by lenders to determine whether or not to extend, reduce, or renew a credit line. Information management company Fiserv
Although Motley Fool Stock Advisor recommendation CompuCredit has been put in the crosshairs of the regulators, you should use the spotlight cast on the practice to review your own spending habits if not to improve your creditworthiness, then to bring a sense of order and control to your financial life.
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