How Credit Card Fraud ACTUALLY Works

Consumers lost over $16 billion from fraud and identity theft in 2016, according to CNBC. Credit card fraud makes up a good chunk of that number, and continues to cost consumers time and money every day. To better understand how to avoid credit card, it is a good idea to understand how credit card fraud works and the tactics fraudsters use to make charges on your account and drain bank accounts. Read on to learn how credit card fraud works so you know how to avoid it.

What is credit card fraud?

Credit card fraud, according to Consumer Action, “is a wide-ranging term for theft and fraud committed using or involving a payment card, such as a credit card or debit card, as a fraudulent source of funds in a transaction.” In layman’s terms, credit card fraud is when someone who is not you tries to use your credit card without your permission.

According to CreditDonkey, 46 percent of Americans have dealt with credit card fraud in the last five years. That is nearly half of all Americans! Odds are, if you have a credit card, you’ve run into fraud, or at least a fraud alert, on your account.

Card present fraud

For many years, the most popular type of card fraud was “card present” fraud. This means someone takes your card, or a copy, to a restaurant or store and uses the card for a transaction they make in person. For many years, the only way to do this was to steal someone’s wallet, purse, or credit card. The bad guys would need physical possession of your card to commit fraud, but technology made it easier for criminals to commit card fraud.

For a low cost, criminals can buy a device called a “skimmer” that can copy the data from a magnetic stripe on a card. The pocket sized devices can capture a card’s data with one swipe. Restaurants are notorious for this, as the server takes your card away from your view for a period of time when they can use a skimmer to steal your card data while running your card to pay the bill. Gas stations and ATMs are also ripe for skimmer devices that capture your data when you insert the card into the machine.

Security chips, recently added to most cards in the United States, help prevent this type of fraud. Cards without a chip are still easy to skim, but with a security chip, criminals can no longer easily duplicate a card and use it for purchases around town. This is pushing the criminals to the internet as their next source of fraudulent profits.

Online purchase fraud

EMV security chips only work at terminals that can read a chip. Because you type your credit card information into a computer for online purchases, security chips do not protect consumers from online card fraud.

Getting people’s credit card data is a lot easier than it should be. Even without skimmers, hackers have stolen account information for many millions of accounts. From major retailer system breaches to the massive Equifax breach in 2017 that revealed private account details for 143 million Americans, we still have a lot to worry about.

Card issuers have taken some steps to improve online security, as have website engineers who implement strong security measures to prevent hacking. Examples include the three digit security code you often use to complete transactions online and SSL, a web security language that encrypts your web connection to the merchant’s server.

At the end of the day, this is a very difficult problem for the credit card and business communities to solve. A PIN system would be a good start, but still wouldn’t solve everything. There is no definitive way to prove that the person on the other end of the internet connection is really you, so until we have some sort of biometric authorization system in place, we will all struggle with internet card fraud.

What happens when you are the victim of card fraud

If you find yourself the recipient of a message from your bank telling you that there is fraud on your account, don’t freak out. For credit cards, banks typically cover the entire cost of the fraudulent transactions. Debit cards offer fewer protections, but still have liability limits in place to protect you from the most egregious losses.

For credit card fraud, you just need to talk to your bank and they will help you get everything sorted out. You may have to sign an affidavit affirming that the transactions are indeed fraud, and then you’ll get a new card in the mail with a new account number. Once you update any automatic payments to the new card number, you are good to go! The bank should remove all fraudulent charges from your account and you won’t have to pay a dime.

Debit card fraud is a bit more complex, but follows a similar path as credit card fraud. The big difference here is that fraud takes money from your bank account, rather than adding charges to a credit account. It can take months to recover your funds. This is why using a credit card is generally safer than a debit card.

If your card fraud stems from a larger identity theft, you have a tough situation on your hands. Follow this guide to fixing your credit after identity theft to learn more.

What you can do to stay safe

There is no magic formula to keep your information safe unless you are a hermit in a cave with no financial accounts that lives on cash only. But if you do live modern society, you can take steps to prevent fraud to begin with. Here are some quick methods you can use to enhance your payment card security.

Switch to digital statements – Bank statements that show up in an unlock mailbox mean identity theft waiting to happen. Getting online statements removes one route to steal your information.
Use a digital wallet – Digital wallets like Apple Pay, Android Pay, and Samsung Pay use a system called tokenization to protect your information. With tokenized payments, your digital wallet provider creates a unique, one-time number to authorize your payment instead of sending your account number and details across the payment networks.
Monitor your accounts – Use an account aggregator like Mint or Personal Capital to see all of your transactions in one place, and review regularly for unrecognized transactions.
Credit monitoring – As a final step, you can sign up for free credit monitoring to get notifications if any changes are made to your credit report, like opening a new account without your permission.

You are your first line of defense

While the banks use sophisticated systems to detect unusual transactions, you are the best defense against card fraud. Take steps to protect your online and physical data, keep tabs on your accounts, and immediately report anything suspicious. If you follow those guidelines, you’ll be in good shape to avoid card fraud. And if you do find yourself a victim, you won’t have to pay for the fallout.