Although responsibility for every penny of debt ultimately rests with the borrower, lenders have developed tempting baits to lure consumers into their traps. A recent New York Times article by Brad Stone describes a system that works against Americans, not for them. Using sophisticated data-mining algorithms, banks and other financial institutions craft tailor-made offers that many find difficult to resist. Stone writes:

The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act.

But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.

Data miners use this information to create specialized databases, which they sell to lenders. One database might contain a list of people who make a modest salary but have many children, for example. Another might feature wealthy widows with small houses. Based on previous market research, a lender can target specific offers to these groups with the knowledge that many people will take the bait.

For a glimpse at how one company collates data, check out Niches 2.0 from Equifax [PDF]. From the brochure:

This tool will give you a complete A to Z picture of your customers and prospects and make it easier to craft the kind of targeted communications that make people feel like you are talking to them individually…The power of Niches is that it clusters information at the household level, unlike geo-demographic systems that base information at the ZIP + 4 level. Niches 2.0 help you target your marketing message, choose premiums to fit your customers, and identify cross-sell opportunities.

If you’ve ever bought a home, you’ve probably encountered one form of this. As soon as you taken out a mortgage, you’re inundated with offers for credit cards, home equity loans, and “buyers clubs”. But that’s child’s play.

Stone says that lenders don’t just use existing information about your life: “Data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.”

These predictive models become increasingly precise as each group of people does or does not take the bait. Researchers hone their algorithms and refine the data. With each pass, the pitch becomes more effective, more persuasive, and more people are led to borrow and spend.

The companies that collect and market the data defend the practice, of course — they believe they’re offering consumers a service. I’m not convinced. If I hand a cold beer to a thirsty alcoholic on a hot day, does that make me a Samaritan? If he drinks it, do I bear any responsibility for what might happen?

Stone’s article is part of a series called The Debt Trap, which explores the surge in consumer debt and the lenders who made it possible. Past articles include:

These articles remind me of Maxed Out, a 2007 film about the credit industry [my review]. Though Maxed Out neglects the personal responsibility side of the equation, its profile of conniving credit tactics is damning.

Note: To fight targeted advertising, take steps to stop junk mail in its tracks.

[The New York Times: Banks mine data and woo troubled borrowers, via e-mail from Patricia]

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