What Is a Bust-Out?
A bust-out is a type of credit card fraud where an individual applies for a credit card, establishes a normal usage pattern and solid repayment history, then racks up numerous charges, and maxes out the card with no intention of paying the bill.
- A bust-out is a type of credit card fraud where an individual applies for a credit card, builds up a normal payment history, and then maxes it out with no intention of paying the bill.
- A bust-out consists of a first phase where an individual develops a good relationship with a card issuer by building a strong credit profile so that they can open numerous accounts and increase their limits.
- The second phase of a bust-out consists of maxing out the new cards and higher limits with no intention of paying the card balances back.
- A bust-out most commonly involves regular credit cards but can also be carried out with a closed-loop store credit card, home equity line of credit (HELOC), or another form of revolving credit.
- Fraudsters typically use their credit cards for four months to two years before "busting out."
- After busting out, the fraudster would have to continue the scheme with stolen identities as they would now have bad credit for not paying their balances.
- Credit card companies have methods to detect bust-outs before they occur, avoiding significant losses.
Understanding a Bust-Out
A bust-out consists of an initial phase where the individual works to develop the card issuer’s trust and a strong credit profile with the goal of opening numerous accounts and receiving credit line increases. Once this occurs, more funds are available for the second phase of the fraud, where the individual makes transactions that they don't plan to repay.
A bust-out most commonly involves regular credit cards but can also be carried out with a closed-loop store credit card, home equity line of credit (HELOC), or another form of revolving credit. According to the credit bureau Experian, fraudsters typically use their cards for four months to two years before “busting out”; accumulating the final charges they don’t intend to repay. This is sometimes referred to as "sleeper fraud."
Individuals with the intention of committing this type of fraud would usually open numerous accounts gradually – topping out at about 10 on average – which they would eventually max out and become delinquent on at about the same time.
Once they become delinquent, they won’t be able to acquire additional credit, but they may repeat the fraud with stolen identities. At the tail end of such a fraud scheme, the fraudster might make overpayments with bad checks in order to increase the credit limit for a short period before the behavior is caught.
Impact of Bust-Out Fraud
A bust-out results in significant losses for credit card companies, but fraud detection algorithms can identify patterns in a fraudster’s behavior to predict a bust-out before it happens. Examples of activity that may indicate a bust-out in progress include:
- A sudden large dollar amount of purchases at a merchant where the cardholder normally only makes small purchases
- A credit report history of frequent consumer requests for new credit cards or higher credit limits
- A credit report history that doesn’t go back very far in time and doesn’t have a mix of different types of credit, like auto loans and mortgages in addition to the credit cards.
There are also legitimate reasons why consumers might have these types of activity, but further studying a consumer’s various credit cards from different issuers and comparing the activity across those cards can indicate whether a bust-out has occurred or could be imminent.
Automation of Bust-Outs
Automation is leading to bust-outs becoming an even more significant problem than they already are. Fraudsters use bots and other emulator devices to create hundreds to thousands of credit card applications in a very brief period. This happens so fast that it doesn't allow financial institutions to detect fraud and once the accounts are open, fraudsters utilize bots to replicate normal credit behavior on these accounts.
Many bust-out schemes are not done by a sole individual but rather large crime rings involving many people to take as much advantage of financial institutions as they can.