After twenty years of helping family and friends work their way out of dire financial straits, I am used to explaining that an unplanned default on credit cards is not a crime, it's only a civil law matter -- a breach of contract. People were legally naive.
The Great Recession started with the same general naivety. By 2010 the conversations had changed, to credit card users telling me about their plans to deliberately max out their credit lines and then default. Some of the plans are surprisingly sophisticated, and nowadays I routinely find myself saying "You did what? And it worked? Never mind -- don't tell me any more."
In short, consumers are learning to out-think the banks' anti-default computer programming. With continuing recession at the consumer level, this becomes particularly relevant in December, since the Christmas season is when the banks' algorithms stagger under the weight of unpredictable buying patterns. It may be even more relevant in January, since while the banks are expecting the usual surge in post-Christmas defaults, January 2011 may produce a flood of defaults.
The banks are fully aware of this broad pattern -- they had a 30 year head start in developing their computerized analysis programs. These were originally developed to identify specific usage patterns associated with stolen credit cards, and moved on to early-warning default prediction. Default prediction leads banks to reduce users' credit limits, often "chasing the balance" down to $0 in credit as users pay down their debt.
It is the default prediction analysis that consumers are learning to game. The goal of users planning a max-and-walk strategy is to max out their cards without triggering the bank to abruptly cut the credit limit (or freeze the cards outright).
Behavioral red-flagging by merchant and buying patterns has been publicly known since being publicized on the website NewCreditRules.com, created by Kevin D. Johnson of Atlanta, after he returned from a honeymoon in October 2008 to find his American Express credit limit severely reduced.
While Mr. Johnson never received a clear response to his inquiries from AE, he concluded that in part he had been negatively profiled for charging purchases at Walmart.
Banks decline to discuss these profiles, preferring to express confidence in their general business savvy, but the sales skills that convinced home buyers to take on liar loans do not necessarily lend themselves to predicting what individual card users will do out on the streets and in the shopping malls. In fact, banks face the same problem that gambling casinos have faced since they formalized the rules of blackjack for their card dealers; once the casinos fixed the rules of engagement, they opened the door to professional "card counters" manipulating the system for gain.
In a similar way, banks' algorithms depend on consumers being unaware of them. Now that understanding of particular red flags is spreading through the Web, banks are facing a mass of consumers who have learned a bit about the mathematics of default detection -- enough to circumvent the algorithms.
What are the known red flags? Downscale shopping venues is one, as Johnson learned. Buying necessities on credit is another -- notably gas and groceries. This suggests the credit card holder is broke, and thus a default risk. (I once had a card frozen in less than five minutes for buying gas and then using it at Walmart; my pattern had fit the profile of a stolen card -- testing the card at a gas station and then rushing to Walmart to max it out.)
However Christmas changes the situation. A thoughtfully structured $300 purchase of food and beverages at a Costco or Trader Joe's -- even if the bank receives the item details -- looks like splurging for holiday festivities, even if the food goes into the freezer and the beverages into the pantry. Four hundred dollars at a tire store looks like a frugal, sensible Christmas gift to a spouse, even if the old tires were bald, and probably even if the brakes were done at the same time -- though the same amount spent at an auto repair shop might be a red flag.
A new computer looks like a sensible gift to a kid in college, rather than an unemployed cardholder desperately replacing their own dying computer. Large charges of staples at an office supply store could be wisely-timed end-of-year tax-deductible purchases for a small business or a 1099 worker. A year's supply of clothes for the cardholder them self looks like holiday clothing gifts. A gas purchase more than 50 miles from home the day before Christmas looks like a family driving to a Christmas get-together.
Fair Isaac's "FICO 8" is supposed to profile the new default patterns of the Great Recession, but mathematics never do a perfect job of predicting human behavior, and the company that failed to flag the mortgage bubble is unlikely to do much better with the continuing implosion of the credit card bubble -- if FICO mattered, since Christmas spending is a fast-paced affair. Banks receiving point-of-sale purchasing detail can move faster, but usually do not take action if the purchases are plausible for Christmastime.
If there is a return to splurging, as compared to the 2009 Christmas season, this will further camouflage the necessity-driven purchasing of the unemployed and under-employed as they max out their remaining cards.
What are the legal consequences for consumers who max-and-walk? Few, if any, says attorney Janet Sherwood of Corte Madera, California: "Fraud is a crime requiring intent, and if consumers don't openly discuss their plans, there is nothing in a pattern of Christmas-time splurging to prove intent." So fraud as a civil matter ends if the cardholder keeps mum. (A bank might still sue for the debt itself -- but could not easily sue for punitive damages.)
Criminal charges are even less likely than a lawsuit. A district attorney's office staff is dealing with violent crime, auto theft, and burglaries every day.
Said attorney David Wellenbrock, formerly a Deputy District Attorney in San Joaquin County, California, "There aren't enough resources to be pursuing fraud charges against consumers -- plus banks should be big enough to look after themselves."
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In 1978, banks doing business nationally were not included. South Dakota, looking to attract bank business to their states, repealed its usury law and the banks flocked there. The other states, fearing loss of their business, also repealed their usury laws.
The rest is history. Rates shot up to 32% in some cases as the banks were making a killing. The only way to re-establish a usury law is on a Federal level, as an attempt by an individual state would see an immediate exodus of its banks from that state to another.
If we are going to have Capitalism/markets, and use private banks, we need to clean out the stables. If we want Democracy we have to cut the financial ties between business and office holders - our system is coming to be known all over the world as corrupt.
Oddly enough, if the IMF, China, OPEC, and other creditors do end up running the US they may force the Constitutional reforms on our pay to play politics and financial sector that we seem unable to do ourselves. Whether they would choose to leave the US a single country or leave much sovereignty behind we would have to find out the hard way.
Banks, mainly big banks have been abusing consumers for years. I hope the losses come out of Executive bonuses, but they won't.
In Mexico in the mid-'90s Wall Street engineered a currency coup that tripled the debt owed by small businesses and family farms and also allowed for them to be massively ratejacked on top of it. Mexicans consequently formed the "el Barzon" movement and pushed back Wall Street and deposed their ruling party of 60+ years. In this country YouTube phenom Ann Minch has already declared the debtors' revolt and begun going after them http://www.revoltstartsnow.com
If you've been pushed under, you can read every other page of my book for free: http://www.scribd.com/doc/25443175/Debt-Hope-Down-and-Dirty-Survival-Strategies-Evaluation-Version-Complete
The consequence for paying consumers is that their charges increase to pay for the walkers. It works like shoplifting - those who pay also pay for those who leave without paying. It certainly does not really hurt the credit card companies - it is just another overhead cost like taxes that they pass on to their paying customers.