Shop till you drop.
Life begins at the mall.
When the going gets tough, the tough go shopping.
Modern sayings
Since obsessive-compulsive neurosis is associated with depression, attempts have been made to control shopping madness with anti-depressants. Pilot studies in the USA have indicated that the disorder is amenable to the selective inhibitor of serotonin reuptake, fluvoxamine... In a small series of seven patients there was a clear diminution in the urge to go shopping and in the time spent doing so. The effects gradually faded after cessation of therapy. In other studies, with the related anti-depressants fluoxetine [the famous "Prozac" happy pill] and sertraline, the shopping urge was reduced in 13 subjects.
The Pharmaceutical Journal
The mad
In law in Australia, a contract made by a person who had previously been held by a court to be of unsound mind, is absolutely void. On the other hand, someone who was mad, but hadn't been found to be mad by a court, could get out of her credit contract only if she were incapable of knowing what she was doing at the time and if the other party knew of her condition. (The same rules apply to the perhaps more common situation of people buying goods on credit when drunk.)
For example, I know of an individual who suffered a head injury and subsequently went on spending sprees, using his previously good credit history. He was liable because he was not obviously mad. Businesses who gave him credit could sue for the debts if necessary. In this case, his unfortunate wife met his obligations, and was just about driven to distraction herself by her spendthrift husband. If any of the businesses concerned had given the man credit again, after the wife had explained the situation, they would have been unable to recover their money.
Generally it's an overstatement to describe people who shop too much as "mad". A problem for retailers is that "compulsive shoppers" (as with some of the other groups we will consider) make terrific customers, as long as they pay - and many of them do pay. And some of them may not pay some debts, sometimes, but do pay others at other times.
In this chapter we will look at the process of approving credit for consumer customers and the signs that might make a consumer creditor reject a credit applicant. One of the themes of this book is the difficulty of predicting the future. However, that doesn't mean that there aren't things to learn that will make the process more successful.
The bad
Most people are honest, even those who don't pay their bills. Most people who don't pay did actually intend to pay when they asked for credit. The few who didn't intend to pay at the time they incurred the credit, committed fraud. So how do the police and the courts tell the difference between someone who intended to pay but now can't, and someone who never intended to pay. Often they can't, so no fraud can be proven.
However, if someone doesn't pay a debt, he is likely to gain an adverse history on CRAA and other databases. Creditors who check such databases are likely to reject his credit application. Therefore, in order to rip you off such a customer may well lie about his identity.
In order to lie about his identity he is likely to use false identification. It follows that the more reliable the ID (or even better "IDs") of a new credit applicant, the less likely that the applicant is intending to rip you off. So check the ID carefully. Some shop staff will check ID thoroughly on cheques, but only glance at them when they're used for opening credit accounts. Staff should check the number on the ID themselves, even if the customer has filled it in, and check that the signature on the application matches that on the ID. Hold both upside down and compare the shapes of the handwriting. It makes no sense to accept anything less than you would accept for a cheque.
Note that in some Pacific Island and Asian cultures, the order of names is not strict and they are sometimes reversed. They may well have documentation and previous credit histories in either version. It can be worthwhile to reverse the orders of names of such applicants and get a second credit report.
Any ID is potentially susceptible to criminal action. However, the best forms of identification are passports and credit cards, where one can be (fairly) confident that others have done a (reasonably) thorough check before they were issued. They have a signature to compare, and passports have a photo. Credit cards can be checked to ensure they're not stolen. At the other end of the scale are video hire cards. NEVER accept these as ID.
It's up to each business to decide what to accept. Remember that signatures are good, photos are good, and the fact that a bank or someone else with more to lose than you has given them a credit card is good. Some criminals will only bother to steal or forge one piece of identification, so the fact that there is more than one form of ID is also good.
Another tool for checking the authenticity of some of the information provided - the address and phone number - is the telephone directory. Its modern, more regularly updated equivalent, is the Electronic White Pages. If a fraudster hasn't bothered to memorise the address and phone number which relates to the false identification, you may catch her out here.
Lastly on this subject, use some common sense. I know a police officer who told me about a young woman she had just arrested for passing over 200 stolen cheques. She said that on the morning of the arrest the woman had bought an expensive diamond ring. When arrested, she hadn't washed for a week, and she stank. The police officer couldn't believe that a shop assistant wouldn't have noticed the smell. That alone meant that she didn't fit the normal mould of "expensive diamond ring" buyers, which should have rung some alarm bells.
Another similar case was a bank which loaned money on the strength of a fraudulently altered letter from a government agency to a man who had tattoos all over his neck, of a kind that often indicate time spent in prison. Not only did they accept that the letter was correct, they failed to take a copy of it, so that there was no good evidence for a prosecution. Common sense and perhaps a small amount of scepticism when customers don't seem quite as they should, are useful attributes for consumer creditors.
Body language
One of the most commonly used symbols of deceit is that of the three wise monkeys who hear, speak and see no evil. The hand-to-face actions depicted form the basis of the human deceit gestures. In other words, when we see, speak and hear untruths or deceit, we often attempt to cover our mouth, eyes or ears with our hands.
Allan Pease, "Body Language: How to read others' thoughts by their gestures"
Few people are good liars, and both sales and credit staff should be good at reading people from how they act. To a trained observer who can see your whole body, it is difficult to lie. Trained liars - actors and con artists - are better able to control their voices, their faces, and their bodies. Such people are rare.
A little knowledge is a dangerous thing. Body language is best understood when viewed on a video that lets the observer watch all of the person's body, and gives access to slow motion and rewind. The heat of an interview or sales situation (in which you are a participant) is not the best time to assess body language, but that's when you have to try to do it.
The basis for the theory that body language will often tell what a person is trying to hide is that your body tends to reflect thoughts more accurately than the words you choose to speak. However, dozens or perhaps hundreds of thoughts can flit through your mind every minute.
And body language is not a precise language. For example, touching the nose and mouth are often said to be a sign of lying, but it is more correct to say it suggests inner contradiction. For example, someone may touch his nose when about to answer a hard question. His brain is working furiously to cope with the complex question while he remains outwardly calm. Touching his nose reveals only the fact that his inner thoughts and outer appearances do not match. People also scratch their noses purely because they itch. Having said that, some practical body language-reading skills are very worthwhile for credit professionals who deal with debtors in person in either the credit approval or collection process.
These signs MAY indicate lying.
¨If contradictory signals are being sent - perhaps the words say "I'm happy to be here" but the foot is tapping impatiently as if to say "I want to leave" - generally believe the signal of which the individual is least aware and in control. People are aware of their words more than their faces, their faces more than their hands, their hands more than their body postures, and their body postures more than their feet. Involuntary signals like blushing or crying are the very hardest to control.
¨When lying, people tend to use fewer simple hand gestures. The best way to deceive is to restrict your "signals" to words and facial expressions that you can most easily control. Because you're not sure what you're doing with your hands, you keep them still.
¨As discussed above, people touch their mouth, nose, and face more when lying.
¨People shift in their seats more when lying. They are saying "I want to be somewhere else."
¨The most common hand action used when lying is the hand shrug - an opening up of one or both hands with the palm facing upwards, while raising the hand slightly. (Try it while shrugging your shoulders at the same time and you'll find it seems to come naturally.)
The stupid and the young
"After a new TV are you?"
"Yes, the old one got repossessed last night."
Actual conversation between appliance store staff member and would-be credit customer.
...I pursued the life of the mind as if the world owed me a living...[failing] to realise that to borrow money without the intention of paying it back is a form of theft. I, on the other hand, believed that property was theft - a more glamorous idea altogether, and one which encouraged the notion that if you could induce an acquaintance to give you some of his property in the form of money you were practically a policeman. Luckily I was circumscribed in my begging from friends, first of all by a shortage of friends and then by their own shortage of cash.
From "Falling Towards England", Clive James' autobiography, which describes a portion of his misspent youth
I went to Cox's [Bank] this morning and find out that not only you have anticipated the whole of your quarter's allowance due this month [£125] but £45 besides - and now this cheque for £50 - and you knew you had nothing in the bank. The manager told me they had warned you that they would not let you overdraw and the next mail brought this cheque. I must say that I think it is too bad of you - indeed it is hardly honourable knowing as you do that you are dependent on me and that I give you... more than I can afford.
Lady Randolph Churchill in a letter to her 22-year-old son Winston, a junior officer in the British army in India
Many retail stores target young purchasers. From their advertising it seems likely that some are also targeting the stupid, though I doubt that any would admit to this. Both the stupid and the young can make great customers.
Both Clive James and Winston Churchill later outgrew their youthful flaws, achieved great success and, we can assume, became good credit risks. Again the message is that it is hard to predict who will pay and who will not; who will have the moral commitment to pay and who will have the ability - the income - to pay.
Minors (those under 18) have limited capacity to contract. The basic rule for anyone under 18 is, don't give credit without an acceptable guarantee. Guarantees are discussed in chapter 9, "Reducing risk".
Minors are generally liable for contracts for "necessaries" and for contracts for their own benefit. Most consumer credit for minors is likely to involve "unnecessaries" (to coin a word) like stereos and cars, and is unlikely to be held to be for the minor's benefit after he has defaulted on it.
Credit scoring
The superiority of credit scoring models over subjective methods for default prediction is well documented. Studies have shown that an empirically derived credit scoring system can better predict bad loans than a judgmental system which is based on discretion and the experience of the loan officer. Credit scoring is also favoured because of its compensatory nature, which means that positive characteristics in an individual's credit record can offset the negative ones. This is a better way of evaluating a loan application than a judgmental method that may focus on one or two pejorative aspects of the applicant's history.
MacLeod, Malhotra and Malhotra writing in the Journal of Retail Banking
Let me make a prediction. In future a lot more businesses will use credit scoring systems to decide whether or not to grant credit . Credit scoring, whether it's done by computer or manually by a credit professional, and whether it's scoring consumers or commercial customers, makes sense.
Here's an example of how it can work. Joe's Department Store takes a completed application form, puts it into a scanner which reads the handwritten information and tranfers it as text into the credit computer. The computer gets a credit report on-line from a credit database and allocates points for certain positive factors it sees. For example, the fact that a person owns her own home might be worth 20 points. It also deducts points. One judgment debt might lead to a deduction of 50 points.
The number of points allocated for each factor is based on statistical analysis on thousands of Joe's Department Store accounts. This research shows that the losses from customers with, say, less than 150 points exceed the profits. The computer adds up the score. Customers with 150 points or more get credit. The number of points also decides the credit limit. The system generates a letter telling the applicant the outcome.
There are a variety of options for working out the final decision on credit scoring and I've described the simplest. For those who demand more complexity there are neural networks and decision trees.
Psychology professor Stuart Sutherland agrees that this type of "expert system", based on computerised statistical analysis, though not always popular with the experts whose intuitive skill it replaces, gets the best results. Sutherland canvassed the academic surveys. They showed the superiority of such analysis to human prediction in such areas as debt repayment, student selection, prisoner reoffending, pilot performance, job satisfaction, suicide attempts by psychiatric patients, growth of companies, and winners at the races. Not once in over 100 studies were the experts' intuitive judgements superior to the actuarial approach, (though in some cases there was little or no difference). Lending money is one area where the machine comes out well ahead of the individual.
Advanced computerised systems will also have access to default information and will use this hindsight to refine and improve the decision-making. Say, for example, that research indicates that home owners are better risks than the average. Initially, the system allocates 20 points to anyone in that category. However, over time, the computer finds that more home owners' accounts are going bad than in the past. It adjusts to this, reducing the number of points given to home owners.
Some large retail chains are operating these sorts of systems already, and the technology is improving and reducing in price rapidly. If Bill's Jewellers (a much smaller operation than Joe's Department Store) can't afford the technology, or doesn't have the customer-base to do the initial research, they will contract out the process to a bank or another retailer or a credit reporting agency.
In summary - what should you base your decision on?
In general you can't reject consumer credit applicants because they are young or stupid. So assuming you don't have a credit scoring system, or lots of debts to analyse the factors that lead to default, how do you make your judgement? Most banking training refers to the 5 Cs. (Sometimes some are dropped off to make them the 4 Cs or even the 3 Cs.) They are:
- Capacity (ability to pay);
- Character (willingness to pay);
- Capital (wealth of borrower);
- Collateral (security, if necessary);
- Conditions (external, economic).
Many consumer creditors who aren't actually lending money are not in a position to make anything more than a superficial assessment of C1 (does the applicant have the ability to pay, as shown by a job and a decent wage), C2 (does she appear honest), and perhaps C3, (does she have capital or assets as evidenced by ownership of a house.) In fact, in my view, there are other, equally important considerations which are not obviously included in the 5 Cs. These are what I call "the three tras":
- Transience (likelihood that the customer will still be at the address you send the account to);
- Trackability (alternative means of contacting or tracing the customer if he does go missing);
- Track record (history or paying or not paying debts).
So in my estimation, the three main causes for rejection of consumer credit applicants should be:
¨Track record - a history of bad debts, court judgments or bankruptcy. The main reason for rejecting credit for most consumer creditors is the fact that the credit applicant has an adverse credit history; that is, has failed to pay a creditor in the past.
¨Capacity - obvious lack of income to meet commitments. However, if you can assess the amount of disposable income - spare cash after other commitments are met - and the stability of income, the results can be surprising. A creditor may decide that a kid with only $30 a week from a paper round, but with no other financial commitments (ie. living at home; fed and clothed by his parents) has enough disposable income to meet repayments on a stereo. Note that the fact that an applicant is on the dole doesn't necessarily mean he has insufficient income. For some consumer creditors, those on benefits form the bulk of their credit customers, with those not on benefits tending to use cash or credit cards. Such creditors may well consider that those on benefits have admirable stability of income. At least that income is unlikely to drop.
¨Character - the "bad feeling" that a creditor has about the applicant's genuineness, based on catching her out in a lie (for example, finding that the phone number on the application form is answered by someone who has never heard of the applicant), appearance (the prison tattoos) or body language, or a combination of these.
The additional factors which are important but less likely to be conclusive are:
¨Trackability and transience - mobile debtors without stable employment or residence, or contactable friends or family are likely to be harder to find if they default.