Wednesday, January 21, 2009

Merchant Codes Make It Easier To Rate Credit Risk By Where You Shop


In August I wrote a story (link here) about shopping choices hampering someone's ability to get a credit-limit increase. Because American Express is well known for employing shopping choices in its risk-management model, I used an American Express example to make my point. Many readers, not surprisingly, were angry that American Express would use this metric to assign credit limits. Which brings me to today's story.

When I wrote my story back in August, I was only talking about credit-limit increases. Since then, American Express has been using shopping habits to whack credit limits (story link here) as well.

A reader of mine, Sean, sent a list of merchant category codes to me this morning. When you look at the codes, you can see just how easy it is for card issuers like American Express to keep track of our spending. Some of the categories, as Sean pointed out to me, are quite granular. Indeed, there are plenty of subcategories, within one industry, to give card issuers plenty of information about our shopping choices.

Take, for example, some of the codes associated with medical treatment. There are codes for doctors (8011), dentists and orthodontists (8021), osteopaths (8031), chiropractors (8041), optometrists (8042), opticians (8043), chiropodists (8049), nursing/personal care (8050), hospitals (8062) and so on and so forth. It's easy to segregate our spending when the merchant categories are chopped up that fine.

Indeed, have you ever been arrested? Ever posted bond? Did you use a credit card to make the bond payment? The bond company used merchant code 9223 when you swiped the card for payment. After getting arrested you felt like unwinding? Headed to a massage parlor, did you? Well, if you didn't use cash (but instead used your card), the massage parlor flagged your purchase under the merchant code of 7297. You get the picture. Some of these codes are quite specific.

Merchant category codes can be used to tell American Express and other card issuers a lot about us. I imagine that card issuers are pretty good at interpreting the data. Given what they have to work with, though, it wouldn't surprise me if some decisions are easier to make than others.

Take a look at the merchant category codes (link here). Notice the particularity that some of them have. I was intrigued by the entire list, quite frankly.

23 comments:

  1. I think in the case of an oncologist or a bondsman, a cash advance (while also not a good choice from a risk profile point of view) would be the lesser of the two evils. Or better yet, use a HELOC or check line of credit then transfer the balance.

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  2. DM, this is what I know: they're watching us. Haha.

    And you're right. I'll take the cash advance over the possible diagnosis of cancer flagging me.

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  3. Note to self: buy the booze at the grocery or drug store :).

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  4. 5542 is how Discover, Citi DE and Penfed (among others) figure out my rebate based on pay at the pump.

    Code 7999 is pretty wide open for interpretation :-)

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  5. @FLT, 7999 indeed does have a broad range :).

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  6. And 5698 tells them that I, or someone I know, may be losing some hair.

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  7. No. I mean massage parlors would like to use the code of 7999 instead of 7297. I pointed to 7297 in my story.

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  8. Let's see... a bad weekend might look like this:

    5921 Package Stores-Beer, Wine, and Liquor
    5813 Drinking Places
    7995 Betting/Casino Gambling
    5813 Drinking Places
    7273 Dating/Escort Services
    3501-3790 Hotels/Motels/Inns/Resorts
    9223 Bail and Bond Payments
    8111 Legal Services, Attorneys
    8011 Doctors
    5912 Drug Stores and Pharmacies

    Think that might make Amex think twice?

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  9. 5698 also might indicate someone's going through cancer treatments as well. Not sure it's the type of info most people would want others knowing about.

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  10. Oops. almost forgot the masterpiece to the bad weekend...losing your false leg/eye/etc somewhere in your drunken escapades:
    5976 Orthopedic Goods - Prosthetic Devices

    Hmm.. wonder if that also applies to "the Whizzinator"

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  11. Now you can see how easy it is for companies like Amex to work their machetes.

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  12. Some people aren't broke, the are just cheap, err I mean frugal. Buying retreads or second hand stores might be the sign of someone who just likes a bargain.

    Along the same lines, there's a difference between someone who BUYS at a pawnshop and someone who SELLS at a pawnshop.

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  13. Clutch, which really shows how difficult it can be to rely on shopping as a good metric for reducing risk.

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  14. This makes me want to go through my last few CC statements and try to assign codes. I'm betting there's a ton of 5542, 5661, 5812, etc.

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  15. PTGenius, this story, I can see, is not going to help anyone stay productive today. :) I've run to the merchant codes at least five times today. Ha!

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  16. I'd like to a risk score assigned to each. Some are bad only when combined with other's, but it could be like a DMV point system.

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  17. What does the IRS do with this? I tried to read Sections 1 and 2 to get an understanding of why the IRS cares about credit card companies billing categories. But it felt like reading a book with half the pages missing. What's the IRS's purpose with all this?

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  18. Crlf, good question. Not sure what the IRS is doing with this at the end of the day, either. Haven't studied that far.

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  19. Crlf, it looks like the IRS is looking at MCC from a 1099 reporting perspective. Goods are not reportable, you pay 2000 for a laptop a 1099 is not required(goods). You pay 2000 in labor to have the computers in your office networked a 1099 may be required (service)

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