This is why you should never go over 50% utilization as the lenders cannot distinguish between that and bust out fraud
Lenders risk models are based on likelihood of intent to pay, of which they can only use heuristics
So at 50-60% the non-hit lenders will much more likely cancel your credit cards
For the person that didnt intend to bust out, this then boosts their utilization to 100% or even higher, if one of your cards was cancelled even with a balance on it
This puts an otherwise good borrower into a credit death spiral if they actually werent in a place to pay the debt down fairly immediately
Maintaining standing in this society is all about psychology and understanding what matters to whom, unsecured credit has a bust out fraud risk
You can game this by getting much higher credit limits before you ever would need them, because then your 10, 20, 50% utilization amounts are proportionally higher too. If you have a spending problem, ever, then you lose standing in this society. Cheers
They would tolerate and even want high utilisation by a normal customer; the problem is fraud. As fraudsters want to get the most out of each crime, they are likely to hit 100% utilisation. So 100% utilisation is a red flag for fraud, especially if it's on every account at once instead of just one card.
It's not really something that the bank can fix by changing the amount of its credit lines. That would only change the dollar amount that each fraud would cost; the fraudsters will still maximally use the credit line no matter its size.
They want the business. You could choose to use their credit line, or one of the other lenders.
An individual lender will [more likely] tolerate the credit limit. Their reaction changes when they can see all the other lenders lines are being used too.
Think of it like giving a girl (or anyone you like) a valentine’s day gift, and then seeing them walk down the hall with a ton of valentine’s gifts. You and some others will consider retracting their benefactorship if you could and more would consider not giving any more.
High limits that quickly get paid down are not a problem. I've even once called my CC company to request an increase specifically for the purpose of putting through one large charge to get the rewards on it--I explained exactly why I wanted it. (It was going to cost me the same if I used a CC or a check.) I paid off the pending amount at the time so the whole amount was available. One big charge, paid off next month, then back to normal.
I'm a little skeptical, but I'm also not in any kind of informed position.
Here's my logic. Their definition of bust-outers are:
- 90 days delinquent
- >70% utilization at close
- Bad check / payment
- incommunicado
- multiple such accounts
This seems to be a set of characteristics that would be met by any person suffering from a combination of a) bad credit choices / general irresponsibility b) sudden financial hardship (maybe just from increasing cc payments).
Experian has potentially attributed to malice what can be explained by stupidity.
Selection bias, but I've known many people like this in the past, and calling them "fraudsters" is being far too generous. They purchase with rose-colored glasses and full bellied optimism, expand their borrowing when things seem to be working out, then walk away from the account when it doesn't pan out the way they wanted. There's a settlement, repossession, or bankruptcy, then a few years of good behavior, and with some non-zero chance, they regress.
There are probably organized rings, but I'd wager the majority of clients satisfying the above criteria are just hard-learners stuck in a generous system that doesn't dissuade them.
The PDF explains that the type of bust-out they're describing here is someone that quietly accumulates a lot of unused credit and then maxes it out rapidly right before walking away.
Yes, I read it. And I recognized the pattern of "good behavior then quick regression" that I'd seen in old friends. One person was doing fine, then bought a car and, when it had trouble, stopped paying knowing full well they'd repossess it. At the same time they max'd credit cards and were stealing money from me.
It's not a rebuttal, just saying that "fraud" implies some prior intent, when it is potentially more of an addict-like behavior in most cases. Either way, stopping the accounts is in creditor's best interest as the end result is the same.
Yeah. I can't see any distinction between their concept of fraud and someone suffering a setback and trying to keep afloat. They'll produce the same behavior pattern, but the intent is different.
I wonder how much of this is premediated vs people getting addicted to credit or having a drop in income and naturally reaching their limit before going bust?
The white paper suggests it's "primarily a first-party fraud scheme".
The ideal customer for a credit card company is allowed to stay just within their limits and just able to make minimum payments, never repaying the capital. It seems natural that will inevitably result in some customers being pushed too far.
Normal credit card customers broadly fall into two groups:
a) try to pay down to zero: "interest is expensive, so I pay off my balance as quickly as I can"
b) max out the credit limit: "I like to buy stuff. Any unused credit is a wasted opportunity". [1]
Even if people in category (b) have trouble repaying their balance, they will call the credit card company and negotiate a sustainable way to recover. Ideally they do this proactively. If not, the Collections department will help them find a solution.
Bust-out fraud, by contrast, is not normal: appear like a good customer for 6 months, get offered a credit limit increase, max out the new high limit, and suddenly disappear.
[1] Before anyone jumps in and say this is irrational or poor financial literacy, it can often be a well-thought through decision. Just with a different set of tradeoffs than your own. I use to run portfolio management for a credit card company. I worked with two very smart data scientists. One was in category (a). The other in category (b). Both knew exactly how much it cost in interest because they built the profitability models. And yet, buying nice stuff was still more important for the (b) person.
> Bust-out fraud, also known as sleeper fraud, is primarily a first-party fraud scheme. It occurs when a consumer applies for and uses credit under his or her own name, or uses a synthetic identity, to make transactions. The fraudster makes on-time payments to maintain a good account standing, with the intent of bouncing a final payment and abandoning the account.
Thanks for sharing this. I work in the industry and this is news to me.
This sort of fraud is probably really hard to deal with in any case, unless you throw more collateral into the mix. Trust is such a tricky (and profitable) thing.
Lenders risk models are based on likelihood of intent to pay, of which they can only use heuristics
So at 50-60% the non-hit lenders will much more likely cancel your credit cards
For the person that didnt intend to bust out, this then boosts their utilization to 100% or even higher, if one of your cards was cancelled even with a balance on it
This puts an otherwise good borrower into a credit death spiral if they actually werent in a place to pay the debt down fairly immediately
Maintaining standing in this society is all about psychology and understanding what matters to whom, unsecured credit has a bust out fraud risk
You can game this by getting much higher credit limits before you ever would need them, because then your 10, 20, 50% utilization amounts are proportionally higher too. If you have a spending problem, ever, then you lose standing in this society. Cheers