How People Commit Credit Card Fraud (And Why You Accidentally Trigger Alerts)

Recently, I wrote about New York's proposed legislation that would require banks to allow you to redeem your points even if your account is closed. After this conversation, I had several conversations about what activities might be considered risky by banks and whether they want to keep your business.
It was based on a presentation I gave at a conference for credit card industry professionals three years ago. Steve Lenderman, Fraud Operations Lead at Paypal, spoke about fraud and how it is committed against financial institutions. He explained why it is possible to commit fraud by having many authorized users and making payments mid-cycle to a card. Bad actors' actions can look suspicious when they are legitimately carried out by the rest.

It is easier than most people think to create fake identities. They create a person digitally or financially that does not exist. This is done using real and fake data.

People who are familiar with how to create social security numbers find it easy. Social security numbers were not randomly generated prior to 2008. However, there was an algorithm that created them.

He recommends that you freeze your credit file for your children as they are less likely to use their social security numbers.

. Everybody's data is available. After the Equifax breach, but before, it is no longer possible to validate social security numbers, birth dates, or mothers middle names.

Here's how you can become a phantom borrower. The fraudster creates a fake identity and gets a fake ID. Finally, he or she decides which social security number to use. The scammer goes to Target and is offered a credit card at the checkout. They are not looking for fraud; they are incentivised to apply.

Credit files are created by applying.

They are likely turned down for credit.

They then go back to the same issuer 2 or 3 times and repeat that process. The file now contains more information.

A bank will eventually approve the loan with a limited limit. The bank is not at risk due to the small limit, but the person is now present.

You can get super simple cards with limits of $500. This person is then marketed to for additional cards.

They don't spend $500 on their identity. As bills are paid, their credit lines grow.

You can apply for credit, open deposits accounts, buy insurance policies, enroll into medical benefits, get drivers licenses, passports, and even apply for credit.

Authorized users speed up the process. As authorized users, they will pay to be added as a user to an existing real account. They use credit repair services that are legalized brokers.

These new authorized user accounts can be reported to the credit bureau and improve their FICO score. Accounts with more than 70 authorized users are not unusual. This is because people sell their authorized user add-ons.

FICO scores jump between 30-60 points every 10-21 days depending on how fast they are reported. They sit on it for six month and get a score of 750. The authorized users then become primary cardholders. A future credit risk is someone who is an authorized user on 70-80 cards. Having 10 or more authorized users on your card is fraud.

Large banks are more likely to be targeted than small credit unions. It is easier to conceal among millions of customers. Synthetics are responsible for 85% of identity theft. People who don't exist owe $355 million in credit card debts. This figure has risen eightfold over the past five years.

Six million credit files are created each year, with very little data or history. 20 million people have valid social security numbers that overlap. The fraud is not reported to any person, and there are no people to contact for collection. This is most often treated as a credit-related loss and then charged off.

These synthetic identities also apply to rewards accounts. They can stick it to the bank and receive rewards for it.

Customers do payment kiting between accounts. The customer takes their $10,000 card and purchases $10,000 at Macy's. They then send in a $20k check with $50 from a checking account. They now have more credit available to spend in the store the next morning, before the $20,000 payment bounces. Banks may flag payments that are in the middle of a cycle.

Merchant rings are another option that cuts out the middleman at Macys and Best Buy. Merchants charge $10,000 and send a check to the cardholder with the net (minor merchant fees). They may also use fictitious merchants. It is easy to become a small merchant through credit card processing.

Credit repair services can help to maintain synthetic identities by taking advantage of the possibility to dispute inaccurate information on credit bureaus. Negative items are removed from a report because some institutions fail to respond within the 30 day deadline. People will continue to dispute the same items until the institution does not respond promptly.

Credit reports that look suspiciously like fraud reports in the past are flagged.


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