In math we trust: the analytical secrets of credit card companies

Introduction

I have a heightened sensibility when it comes to recognizing the use of data mining and analytics.  Having studied computer science in college, I am fairly knowledgeable of those disciplines. So it was no coincidence that I was able to draw attention to the ill-conceived data mining practices of American Express.  Ultimately, my public relations salvo against American Express was not about me being a victim; instead, it was about the credit card company understanding the need to change its algorithm.

I am not sure whether American Express made any adjustments as a result of my efforts and the ensuing public outrage—it said it did—but I do believe that all credit card companies learned a sobering lesson: Mathematical models built on dubious assumptions can and do backfire.  In fact, one of the reasons I think my story was so popular—and continues to be today—is that the current economic crisis occurred, in large part, due to our increased reliance on and faith in esoteric and erroneous mathematical models.

During the height of my notoriety, I received hundreds of e-mails from concerned consumers, asking me and giving me insider information about how these models and algorithms work.  I responded to each inquiry and often posted these responses in detail on my blog.  However, I have never delved into the mathematical concepts of data analysis with an emphasis on how a credit card company might use them. Well, not until now. 

My desire to explain some basic methodologies and models on this blog comes from the realization that we live in an increasingly data-driven society.  From internet searches to phone records, from credit card purchases to tax returns, companies have access to huge data sets which enable them to, in many cases, know us better than we know ourselves. The access to and interpretation of such data empowers companies beyond belief. This tremendous power should go neither unchecked nor overlooked, especially by the very consumers who are often the subjects of its manipulation. 

The next few posts will introduce you to the world of analytics.  They will give you confidence to challenge its applications and assumptions.  But most importantly, they will help you gain more control over your destiny, which is increasingly determined by the use of mathematical formulas.

Think twice before you ‘Like’: Social media are credit card companies’ newest weapon

Better risk management: That was the biggest and hardest lesson learned by credit card companies during the credit crunch, which started in fall of 2008.  Ever since that frightening period—some call it 'The Great Recession’—consumers and businesses alike have experienced tighter risk management through closed accounts, reduced credit lines, higher interest rates, and more stringent guidelines for credit applicants. 

In an unprecedented effort to minimize their risk, credit card companies and banks have sought every possible resource at their disposal to capture and to store more information about customers—and that includes using social media. While many consumers understand that companies have access to their transaction histories and credit reports, most overlook the tremendous metadata available via social media companies like Facebook.  With the help of such new media, credit card companies have almost a 360 degree look at their customers. 

Another reason to pay your credit card balance in full every month: returns

There are several reasons you should pay your balance in full every month.  I recently discovered yet another. 

A few weeks ago, I purchased a converter box for my analog TV. The experience was difficult and embarrassing, considering that few stores still carry converter boxes and that I’m probably the only person in the world who doesn’t have cable. (I haven’t had cable in over 10 years.) 

After installing the box and antenna, I realized that I couldn’t get ABC and that some of the other channels didn’t come in strong.  What a waste of almost $80!  I returned the box and accessories a few days later, but I wondered if I would pay any finance charges to my credit card’s bank during the time I had the products.

Here’s the answer. Let’s assume that my $80 transaction is the only purchase on my credit card, and that the transaction occurred on the first day of my 30-day billing cycle.  If I had waited too long to return the items—longer than my billing cycle—and hadn’t paid my balance in full, I would have lost money.  In other words, I would have paid finance charges on my daily balance of $80.  If my Annual Percentage Rate (APR) was 15.9%, and thus my Periodic Rate was 0.04356% (APR divided by 365 days), I would have ended up paying about $1.05.

So, in short, even if you a return an item and get a full refund, you can still end up paying finance charges on the money you borrowed from the bank. Just make sure you return items within the billing cycle you purchased them.

Related article(s): [ How paying your bill early saves money ]

The phrase that gets you results every time

I am sure that you have been in a similar, frustrating situation: A froward customer service representative is giving you the run around, making your goal of resolution seem impossible.  Whether he or she is trained to be difficult or is just having a bad day, you get no results. 

I have a clever solution to overcome this problem, and it is sure to get a reaction.  It works in the customer’s favor about 95% of the time. 

How to get rid of credit card junk mail

If you are like me, you receive about five credit card solicitations in the mail every week.  There is the Citi Platinum Select AAdvantage World Master Card, the Discover More Card, and the Capital One Platinum Prestige Card, just to name a few.  I do open them, though, only to make it easier for the paper to go through my overworked shredder.  I get especially annoyed when they put a dummy card in the envelope to get me extra excited. One time, I didn’t catch the fake card and almost ruined a good shredder.