Among US credit card issuers, there is a very important department called the Risk Department. This department has one job: monitoring the company’s operational risk. The people in this department are not like the customer service reps you usually deal with. They are not there to chat with you or be especially friendly. Most of the time, they will never contact you at all. From the day you open a card to the day it gets closed, you may never hear from them once. But if they do contact you, they usually get straight to the point and ask for whatever documents they need in order to reduce the company’s risk. Today, let’s talk about this relatively mysterious department inside credit card companies.

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The Relationship Between the Risk Department and Us

The first thing to make clear is this: their relationship with us is adversarial!

As credit card applicants and cardholders, we are essentially borrowing money from the credit card company to make purchases and then paying it back later. For the issuer, the biggest risk in lending us money is that we will not pay it back. The risk department’s job is to reduce bad debt as much as possible in order to protect the company’s interests. One way they do that is through early warning. In other words, if they think we are risky, they would rather stop the problem before it gets bigger, reducing the chance of future bad debt. To put it a bit dramatically, from their point of view, every one of us is a potential thief. Their job is to look for clues in our behavior that suggest we may borrow and not repay, then stop us before we can pull off anything big by taking away our ability to borrow.

Of course, reducing bad debt is only the most basic goal. They also watch for cardholders who violate the cardmember agreement (terms & conditions). One of the most common examples is abusing the credit card rewards system, and I’ll give some examples of that below.

The most important thing to understand in this relationship is this: the bank has the right to close your account. You could say this is a one-sided term every bank has, and we all clicked “agree” when we applied. The risk department is precisely one of the key departments with the authority to decide whether your credit card account should be closed. In other words, once they make a final decision to shut you down, it is usually very hard to reverse. If you contact regular customer service or even senior reps, they will tell you it was a decision made by the risk department and they cannot change it. Contacting the BBB (Better Business Bureau) or small claims court may help you recover some losses, but it may also get you placed on a permanent blacklist, meaning you may never again be able to apply for that issuer’s credit cards.

What Counts as High-Risk Behavior?

Since the credit card issuer’s risk department is not something you want to mess with, what kinds of high-risk behavior should we avoid? This may sound like an easy question, but as outsiders, none of us really knows how their models work. Someone else may do exactly the same thing you did and be completely fine, while your account gets shut down. On the other hand, someone who appears perfectly innocent may suddenly get closed for no obvious reason. I don’t have a definitive list of high-risk behaviors, but I can give some examples I’ve seen and use them to summarize a few patterns. There is no need to panic too much. At worst, one issuer closes your account and you move on to another one.

First, here are several behaviors that may be related to bad debt, since bad debt is what the risk department cares about most:

  • Returned payments
  • Failing to make the minimum payment for a long period of time
  • Opening many credit cards in a short period
  • Large spending in a short period of time, or a major change in spending patterns
  • Misstating income, or having income and spending that are seriously out of line
  • Credit limits that are too high, or a total credit limit that is too high relative to income

Returned Payment

A returned payment is basically the equivalent of writing the bank a bad check when you make your payment, and then the bank discovers it cannot actually collect the money. Possible causes include the following:

  • You entered the wrong checking number or routing number when making your payment
  • There was not enough money in the account you used to cover the payment amount
  • The account you provided could not be used for the issuer to pull funds from it
  • The name on the payment account was not your own

Everyone can make an honest mistake, but one thing to pay special attention to is this: having a returned payment on your very first payment can have an especially serious impact. The reason is simple. The bank has not yet built a relationship with you. You borrowed the first batch of money and then effectively handed them a bad check, so they could not even collect that first payment. Naturally, your risk level goes up. My suggestion is that for your first payment, use a bank account you know well, make sure there is enough money in it, and ideally use an account you have successfully used to pay other credit cards before. You can also use Bill Pay from your bank to push the payment out from your own account, which usually works fine.

Carrying Debt for a Long Time

With US credit cards, there are generally two payment amounts to think about. One is the minimum payment due, which is the amount you must pay that month. If you do not even pay that, you may be charged a large late fee. The other is the full statement balance from last month. If you do not pay that in full, you will be charged interest. So if you truly cannot pay everything, at least make the minimum payment every month. That is much less risky than paying nothing at all. Of course, if you can afford to pay the full statement balance, there is no reason to give the bank interest.

Opening Many Credit Cards in a Short Time

This is fairly common among people who actively pursue credit card rewards. Sometimes issuers seem to release all-time-high welcome bonuses on several cards at once, which can be hard to resist. Some people also like to apply for several credit cards together in one App-O-Rama (AOR) to save on HPs (hard pulls). In reality, all of these actions can raise your risk profile in the eyes of the risk department. Think about it: why would an average person suddenly apply for many credit cards at once? From the bank’s perspective, could it look like someone is trying to run up a lot of debt and disappear without paying? That is why you should have a clear application plan and avoid applying blindly. Otherwise, if you trigger the risk department’s bottom line, it may not be worth it.

Large Spending in a Short Time / Major Changes in Spending Patterns

This one is harder to define, because spending naturally changes over the course of the year, especially during shopping seasons. But one especially high-risk behavior is large spending shortly after opening a new credit card. The reason is obvious: the bank needs time to get comfortable with you and figure out whether you can actually repay what you spend. There is also the issue of sudden changes in spending patterns. If you normally do not shop at Target and then suddenly start spending heavily there, that may attract the issuer’s attention. Similarly, if most people are buying water and snacks at CVS and their average transaction is around $30, but your CVS purchases are consistently $500+, that may also get noticed.

Misstating Income, or Having Income and Spending That Don’t Match

Some people like to report inflated income when applying for a credit card in hopes of getting a higher credit limit. Generally speaking, banks do not investigate your income routinely. But if you engage in several high-risk behaviors, such as some of the ones listed above, the bank may decide to take a closer look and ask whether your income really is high enough to support all of your debt. If they decide you clearly cannot afford it, they may close your account.

Credit Limits That Are Too High / A Credit-Limit-to-Income Ratio That Is Too High

This one is a little strange. If the issuer approved you for a certain limit, that would seem to mean they believed you could handle it. But in my view, from the risk department’s perspective, having too much total credit with that issuer, especially if it is several times your income, may also place you in a higher-risk category.

What Else Can Trigger an Account Closure?

As mentioned above, the risk department also cares about whether you are abusing the issuer’s rewards system, since that can also cause losses for the company. Here are three brief examples:

The AMEX Blue Cash (OBC) Incident

More than half a year ago, AMEX took action against a large group of people who were “abusing” the AMEX Blue Cash card. At the time, the card’s 5% cash back had no cap, so many people took advantage of that by buying large amounts of cash equivalents, such as Visa gift cards, and then cashing out. Some people even treated this as a full-time business, putting $50,000 or $60,000 a month on the card. That meant they were earning $2,000 to $3,000 a month just from credit card rewards. In the end, AMEX realized that the merchant fees it collected from these users were lower than the cash back it was paying out. Once the losses reached a certain point, the risk department aggressively shut down accounts and confiscated cash back. Some people even had all of their AMEX cards closed and were blacklisted for a long time, unable to apply for any AMEX card again. AMEX also changed the Blue Cash terms so that only the first $50,000 in spending would earn 5% cash back. Personally, I think this was fundamentally a loophole on AMEX’s side, because they had no way to distinguish normal purchases from purchases of cash equivalents used to generate unlimited 5% cash back. If you can set up a game like that, you should be prepared to lose sometimes too. Changing the terms was understandable, but shutting down accounts felt pretty unfair.

The Chase Points Transfer Incident

Anyone in the points-and-miles world is familiar with Chase’s Ultimate Rewards (UR) system. At present, Chase allows UR points transfers only between spouses or domestic partners living in the same household. Some people took the risk of transferring their UR points to other people, sometimes even to several different people. Chase eventually discovered this, confiscated all the points, shut down all of their accounts, and blacklisted them.

The Mysterious Discover Shutdowns

Some time ago, major Chinese-language forums were full of reports from people saying that Discover had shut down their accounts for no apparent reason, leading to all kinds of speculation. Some had held the card for ten years, always paid on time, and only occasionally used Discover’s quarterly 5% categories. Some used Discover Deals, Discover’s shopping portal, without even paying with a Discover credit card, yet still collected Discover cash back. Some people had barely used their card for years and still got shut down. Some were unwilling to accept it and wrote letters, called the bank, or even went through the BBB to ask why their accounts had been closed. In the end, the only answer they got was that Discover no longer wanted to do business with them. Meanwhile, there were no similar shutdown reports on non-Chinese forums, and the whole thing remains a mystery to this day.

Summary

From this article, you can see that credit card risk control is strict and takes many different forms. These high-risk behaviors are things you should pay attention to and try to avoid. But does violating one of the items above always mean something bad will happen? Do different banks enforce risk control differently? What specific red flags does each issuer have? And if you do trigger one, how should you respond? The next article will go into those questions in detail.