11/30/2010 11:46 am ET Updated May 25, 2011

Credit Card Max-and-Walk: Consumers Learn How to Game the Banks

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, 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."