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
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.
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.
[+] [-] vmception|4 years ago|reply
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
[+] [-] dataflow|4 years ago|reply
[+] [-] jvanderbot|4 years ago|reply
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.
[+] [-] joezydeco|4 years ago|reply
[+] [-] LorenPechtel|4 years ago|reply
[+] [-] srmarm|4 years ago|reply
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.
[+] [-] stevesimmons|4 years ago|reply
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.
[+] [-] whereis|4 years ago|reply
[1] https://en.m.wikipedia.org/wiki/Bust_Out
[2] https://en.m.wikipedia.org/wiki/A_Hit_Is_a_Hit
[3] https://en.m.wikipedia.org/wiki/Linda_Tripp
[4] https://en.m.wikipedia.org/wiki/Identity_Thief
[+] [-] whereis|4 years ago|reply
[+] [-] twic|4 years ago|reply
Sounds like a long firm:
https://en.wikipedia.org/wiki/Long_firm_fraud
[+] [-] meowface|4 years ago|reply
[+] [-] bob1029|4 years ago|reply
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.
[+] [-] dataflow|4 years ago|reply
Speaking of which: the rest of the thread may be interesting as well.
[1] https://www.reddit.com/r/personalfinance/comments/nu00y3/ide...