Welcome back to our ongoing risk series … err, what’s the opposite of masterclass? Yeah that thing. Today, we’re tackling credit risk, which frankly goes both ways just like a poorly tuned metronome:
- The risk an individual bank sees
- The risk that you’re controlling
Spoiler: The bank’s risk is minimal compared to yours.
Bank’s Perspective: You Look Like a Baddie, and not a Good Baddie
Normal people use their credit card for a few hundred dollars worth of groceries, Netflix, the local coffee spot, a restaurant or two, with wild out of the ordinary purchases once or twice a year that exceed $1,500, like say a new couch.
A manufactured spender, on the other hand, might spend $5,599.99 one minute, $1,999.99 at a store repeatedly over the next 10 minutes, and then $2,047.60 five minutes later, all using the same card. Sure, you can train a bank’s algorithm to think that’s normal, but the second a fraud analyst looks at your transactions, the jig is up. When an analyst looks at a manufactured spender’s account, scary sounding terms like bust-out (it looks like it), money laundering (it’s not), identity theft (it’s not), fraud (it’s not), and spending problem (guilty) start appearing in their mind.
The bank is going to take that and go one of two ways:
- Financial review: Pause your credit accounts, require your tax returns, and then ask you to justify how you can spend $90,000 daily on a W-2 job that definitely doesn’t pay that daily, or even monthly
- Shutdown: They just close all your accounts, blacklist your social security number (unless they don’t), and accidentally mail you a check for -$0.33 to cover your confiscated points balance
So, how do you manage credit risk as seen from the bank’s perspective?
- Train the automated algorithms so they don’t fraud alert while you’re buying $1,015.90 in bananas
- Don’t do things that cause an analyst to look at your account
- Have enough funds at the institution to give them confidence that you’ll be able to pay your credit card bill
- Minimize cycling, where possible
- Diversify your spend, don’t put it all on that Credit One Vegas Golden Knights card
It also helps to know which banks are more tolerant; like most things there’s a spectrum.
The Credit Risk You See
The way in which some manufactured spenders string together FinTechs, quasi-banking institutions, and rewards cards is magical at best and demonic at worst. It’s great when everything is working though! Let’s take a sample fictitious loop:
- Credit card → Neobank → Futures market → Bill Payment → PayPal (heaven forbid) → FinTech → Hub bank account → Credit card
You probably earn something at most of those steps along the way. Cool, eh?
Now, what if you’re floating $450,000 spend spread across a dozen credit cards in-between statements while running through this loop, and PayPal decides it’s going to freeze your account and hold existing funds for 180 days? In the process, it rejects an incoming payment and causes the futures market provider to hold its funds too.
Now you’ve got some or all of that $450,000 tied up for six months, and probably credit card bills coming due to multiple lenders in less than a few weeks.
How do you manage that?
- The age-old adage: Never float more than you can afford to lose (hopefully only lose temporarily in this case)
- Why do one big loop when you can have multiple smaller, hopefully uncorrelated loops? Let one fail rather than all of them
- Have a plan for stitching together the ends of the loop when the middle fails
- Chargebacks? (Don’t do this)
Good luck out there, and have a nice weekend friends!
Next time: How to know when the jig is up, networking style.