Credit Cards – A Window to Possible Cash Problems

By Mark A. Hutton, CPA, CFE – Hutton, Kruse & Fink, Ltd., Buffalo Grove, Illinois

Credit cards are as much a part of the American way of life as the automobile, sports and advertising. All you need to do is look at your mail to see that not only are credit card companies aggressive in their attempts to get you to sign up, but they are just as anxious to get you to ask for more credit.

In today’s society, the prevalent use of credit cards needs to be considered when evaluating the possible financial motive for fraud relative to a claim involving arson or an inflated claim.

Every situation and claim is different, with unique circumstances, but there are several areas to investigate when evaluating where credit cards fit into the picture in a financial profile of an individual or couple. These are some of the more customary areas to evaluate:

Payment Patterns

Types of Transactions

Monthly Balances Carried

Funds Sourced for Payment

 


Payment Patterns

Some of the most conscientious people have run into financial problems during the normal course of just living their lives. There are doctor bills, dental bills, holiday, anniversary and birthday gifts, vacations, dining, cosmetics, clothing and entertainment expenses that are easily transacted on a credit card. When the monthly bill comes, the cardholder needs to make a decision regarding whether to pay the bill in full or to make a partial or minimum required payment.

The analysis of payment patterns for credit card statements can reveal symptoms that may indicate financial stress for the cardholder(s).

A sudden change in pattern of payment at a point near the time of the suspicious claim or event may be an indication of financial stress on the cardholder. Some areas to look into would be:

  • The availability of funds at the time of payment.
  • Was the employment or business situation of the cardholder(s) stable?
  • Was there an unusual expense that caused the monthly transactions to far exceed their normal level?
  • Was there another expense, unrelated to credit card items that needed to be addressed by the cardholder(s)?

Types of Transactions

For the vast majority of credit card customers, the use of a credit card will be for the purchase of an item or service. When reviewing the detail of transactions, if the content of transactions changes from what the typical history of the cardholder would normally consist of, this would be a clue to other areas to investigate. For example, if the credit card transactions typically consist of larger transactions for durable goods, restaurants and entertainment and then purchases for groceries start to appear, that might be an indication of a cash shortage for the cardholder. When the credit card becomes the tool to pay normal monthly expenses that were formerly paid by check or debit card, it is a clue to the investigator that something changed and reasons for this change should be researched.

Additionally, if the credit card is typically used to make purchases and then there are transactions indicating that a cash advance was taken on the card or a credit line was accessed, this is another reason to investigate the reason for this type of additional debt being shouldered by the cardholder. Cash advances can be used to help pay off another debt that charges a higher interest rate, and often the credit card company will offer an attractive lower rate for a short time period to entice the cardholder to utilize the additional credit option. However, a history of accessing credit lines and taking cash advances is a red flag to investigate further when evaluating for financial motive.

When fees for late payments and excess balances appear in transaction details, these should be evaluated in light of other documentation available as well.

 

Monthly Balances Carried

It is important to look at the balances carried on credit cards and other debt in the aggregate for a broad enough period to determine trends in overall consumer debt patterns. Two situations that could be indicators of motive are:

  • Instances where very high levels of debt (in aggregate), relative to available credit,  are carried for a long period of time
  • A trend of increasing total debt during the time period leading up to the claimed incident

Both of these situations would be an indicator that there is possible financial stress occurring with the debtor / cardholder and that other information needs to be evaluated.

Funds Sourced for Payment

Not only should the amount of payment on monthly credit card debt be reviewed, but the source of funds used to pay the credit card bills is relevant. It can be safely assumed that most credit cardholders will make payments on credit card balances from their checking accounts.

Information concerning the available balances in the checking accounts used to pay credit cards should be reviewed to determine whether the level of funds in the accounts remains stable over time, increases or becomes depleted during the time leading up to the claimed event.

Additionally, all sources of funds, including savings, investments, credit lines, other credit cards and loans should be evaluated to determine if credit cards are being paid from these sources, which might be an indicator of financial stress on the cardholder(s).

Judgment comes into play in these types of analyses and it is important to review documentation over a period of time that is long enough in order to provide an indication of typical patterns before and leading up to a claimed loss where possible. Further judgment needs to be utilized in determining the types of documentation to obtain and what information in credit card documents reveals relative to other information reviewed. Credit card documents are one component, but an important one to consider, in the evaluation of financial motive.

The following article was originally published in the January 2005 issue of The Informant, a bi-monthly publication for members of the Illinois Chapter of the International Association of Investigation Units.
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