Credit card fraud is a form of theft where a fraudster makes a transaction by using another person’s credit card. It is a kind of identity theft where unauthorized transactions occur by either charging purchases to the account or withdrawing funds from the account. In some cases, this can be an incident of outright theft when the fraudster steals the credit card or its related information. It is one of the common types of bank fraud as it affects approximately more than 151 million adults (65% of the cardholders) in a single year in the US alone. As credit cards are the most common mode of payment in the US, credit card fraud is also common. Further, the fraudsters can easily take control of the card, increasing these thefts.
The U.S. Federal law (15 U.S.C. §1643) has put a limit on credit of $50 to cardholders for credit card theft, but most banks can waive this amount if the cardholder signs an affidavit explaining the theft. As of 2023, the Federal Trade Commission has mentioned that credit card fraud has become the most common identity theft in the U.S.
Key Takeaways
- Credit card fraud is when a fraudster attempts unauthorized purchases using another person’s credit card.
- In the U.S., millions of credit cards or their numbers are stolen every year accounting for billions of dollars in illegal activities.
- The federal law states that a cardholder is limited to just $50 for credit card fraud and the theft must be properly justified and reported and proper measures should be undertaken.
- There are third-party theft protection services that are expensive and they follow the same procedure which can be followed by any individual.
Table of Content
- How does Credit Card Fraud Happen?
- Examples of Credit Card Fraud
- Types of Credit Card Fraud
- How to Avoid Credit Card Fraud?
- Impact on Financial Organizations
- How can Companies Detect and Prevent Credit Card Fraud?
- Conclusion
- Credit Card Fraud – FAQs
How does Credit Card Fraud Happen?
Credit card fraud is classified as identity theft since the fraudster, using stolen information, is essentially pretending to be the account holder. They accomplish this in two major ways: account takeovers and application fraud. In account takeovers, a fraudster can make use of a credit card by stealing it from a legitimate user and then impersonating that person to conduct unauthorized transactions.
So, how do the fraudsters gain the personal information of the cardholders? There are several ways through which fraudsters can capture vital credentials of individuals. Some of the ways are:
- Skimming the credit cards suppose at a gas station pump or ATM
- Lost or stolen credit cards
- Calling about fake prizes or wire transfers
- Hacking your computer
- Looking over your shoulder at checkout
- Phishing attempts, such as fake emails
- Stealing your mail
This list is not exhaustive as fraudsters always find new methods to steal information to attempt credit card fraud. There is no foolproof way to stop hackers or fraudsters from making such frauds.
Examples of Credit Card Fraud
In U.S credit card fraud has become a common crime. In 2023, 426 thousand reports were filed for credit card fraud. Several types of credit card frauds is being followed. In 2019, a skimming card fraud was reported in New York City where scammers or fraudsters placed skimming devices at gas station pumps and on ATMs. These skimming devices captured the vital information of the cardholder using the magnetic stripe on the card. It also noted the PINs of the cards. The fraudsters created counterfeit cards from the stolen information, and then they withdrew huge amount of money from ATMs before the cardholders could realize that their cards were compromised.
In another incident in 2020, online shopping websites were breached by a group of hackers. They stole personal information of thousands of customers. This stolen information was used for unauthorized online purchases that resulted in a loss of millions of dollars. The fraudsters identified the weakness of the payment processing system of the retailers and so they could breach the vital information of the customers.
Types of Credit Card Fraud
Credit card fraud can happen in different forms and sizes. These frauds can happen either online, over phone calls, via text messages, or in person. Individuals can be duped by fake emails, leaking of information in a data breach, or the cards can be stolen. These are certain possibilities of credit card fraud. Thus, it is necessary to know about the different types of credit card fraud. Below are the most common types of credit card frauds:
1. Card Skimming: A small device known as a skimmer is used by fraudsters to steal credit card information using the magnetic stripe on the back of the card. Once they get hold of the information, the fraudsters can either clone the card or use the stolen credit card credentials to make online illegal purchases.
2. Phishing: Fraudsters send emails or texts to their targets in a phishing attack. They claim to be legitimate institutions such as a bank, credit card issuing company, or any organization that the cardholder might trust. Then, they trick their targets into revealing their credit card’s crucial and private information.
3. Malware: If an individual (victim) downloads certain malware unknowingly to their computers or devices, then fraudsters can work in the background completely undetected. They are then able to grab the credit card information if the victim or individual enters the credit card details online.
4. Card-not-Present (CNP) Transactions: Fraudsters steal the credit card and personal information of the victim and then use the information to make illegal purchases either online or via phone. This CNP fraud is difficult to prevent as there is no physical card to verify and the seller cannot verify the buyer’s true identity. This is a form of virtual fraud.
5. Account Takeover: After the scammers can steal the personal information of the victim, they contact the credit card companies pretending to be the real cardholders. If the victim provides a week passwords then the scammers can easily change the passwords and also the PINs to take over the account. This credit card fraud can be detected when the victim tries to use their card or log in to their account online.
6. Credit Card Application Fraud: Criminals apply for credit cards using stolen personal information such as names, addresses, birthdays, and social security numbers. This form of fraud can go unknown until the victim requests for credit or requests their credit report. While the victim is generally not liable for any transactions made using fraudulent credit card accounts due to the cards’ protection, this form of fraud might harm the victim’s credit score. There are certain types of credit card application fraud such as synthetic identity fraud, stolen identity fraud, credit card churning, and authorized user fraud.
How to Avoid Credit Card Fraud?
Most credit cards now include sophisticated security features. There are alsofree credit monitoring services thatare an easy way to keep track ofyour credit cards.
The most simple steps you can undertake are choosing a card with $0 liability protection, closely monitoring your accounts, signing up for transaction notifications,and safeguarding yourdata.
1. Choosing a Card with $0 Liability Protection: The Fair Credit Billing Act (FCBA) provides protection against credit card fraud and they ceil the maximum liability to $50. However, some companies (card issuers) waive this law by providing $0 liability against fraud for unauthorized charges, i.e., the victim won’t be liable for any amount of fraudulent purchases. A few of these card issuers are- the Citi Double Cash card which requires to fair to excellent credit score, and the Blue Cash Preferred card from American Express, Chase freedom and the Bank of America Travel Rewards Credit card, which require a good to excellent credit score.
2. Monitoring your Accounts: Regular monitoring should be done on credit card transactions either in statements or online accounts. If any suspicion arises, immediately contact your card issuer to investigate the transaction. There are credit monitoring services that provides real-time alerts of potential fraud. Some of such companies are IdentityForce and CreditWise from Capital One. This would help individuals to protect their personal information.
3. Signing up for Transaction Notifications: Signing up for a credit monitoring service and manually monitoring your account is a preventive measure to track any unusual activity from your account. However, an additional protection can be created by allowing notifications from your card issuer. The incoming of notifications can be set for different purposes such as transactions exceeding certain limits, foreign purchases, requests for balance transfer, and other activities.
4. Safeguarding your Data: When you purchase something either online, in-store, or over the phone, you need to make sure that your information is secure. For example, for online transactions, the website should contain “https” at the beginning of the URL and the wifi should be private. For in-store transactions, don’t leave your card visible to other customers. For over-the-phone transactions, make sure that the call was initiated by you.
Impact on Financial Organizations
The financial organizations that get impacted due to credit card fraud are the banks. Every fraud causes direct financial losses and stresses bank resources as they should launch investigations and issue refunds. There are indirect impacts as well which are equally destructing with time.
If the fraud rates are high, then the bank’s reputation is at stake for security purposes and also the trust of their customers is shaken. The banks might lose their customers as the customers move to their competitors who are more resilient to fraud. Amid attacks, banks try to prevent and protect themselves from further damage and in this, they disrupt their customer service which further frustrates the account holders.
For the industry as a whole, rising fraud rates may discourage individuals from using digital banking systems which provide convenience as well as effectiveness. Innovation might slow down if banks become overly risk-averse, falling behind the digital transformation curve. Banks must explicitly deploy rigorous security measures. Otherwise, they risk losing a lot moremoney. Customer loyalty, competitive advantage, and strategic advancement into the digital future all swing in the balance.
How can Companies Detect and Prevent Credit Card Fraud?
There are certain technological tools and security practices that the companies in the U.S. inculcates to detect and prevent credit card fraud. Below are some of the strategies to combat credit card fraud:
1. Use of Advanced Technology: In the U.S. there are fraud detection software that uses machine learning algorithms and AI-powered software to analyze patterns of transactions. This is done in real-time to detect unusual or suspicious activity. Further, companies have started to issue EMV chip-enabled cards which offer more security compared to the traditional magnetic stripe cards. Another use of technology is tokenization and encryption implemented to protect the crucial personal information of their customers during transmission and storage.
2. Stringent Authentication Methods: There is a multi-factor authentication (MFA) system that requires a one-time password (OTP) sent to the mobile number in addition to the card details. As stringent authentication technique, another method used by the companies is biometric verification. Biometrics such as facial or fingerprint recognition are taken for authentication both for online and mobile transactions.
3. Regular Monitoring and Analysis: The companies regularly monitor the transactions for signs of fraud or unusual activity. They look for suspicious spending patterns or transactions done from unfamiliar locations. They further provide real-time notifications to customers to prevent any suspicious activity or transactions that exceed the pre-specified limits.
4. Training and Awareness to Employees: Companies train their staff to recognize any signs of credit card fraud and to maintain the laid down guidelines to handle unusual transactions. Also, customers are educated regarding the protection of their credit card information and their data from unfamiliar emails, phone calls, or texts. Customers are also made to understand how to recognize suspicious fraud.
5. Collaboration and Information Sharing: Companies should collaborate with other businesses and financial institutions to stay updated regarding recent trends and techniques in fraudulent activities. Also, the law enforcement agencies must be informed to investigate any fraudulent activities.
Companies, by implementing these strategies, can detect and prevent credit card frauds, protect their customers, and build trust among their customers for their financial transactions.
Conclusion
Credit card fraud is a common phenomenon and the users should be alert and aware of the fraudsters. Sharing vital personal information via phone, online or in-store is highly not recommended if the receiver is not an authorized entity. Credit card frauds can be clubbed into two categories: application fraud and account takeover. Both these categories cause a huge loss to the millions of users.
Credit Card Fraud – FAQs
How frequently does a credit card fraud come into light?
This depends on the measures taken by the victims after they notice possible potential fraud and the prevention tactics taken by the banks or card issuer to detect fraud. As per some statistics, less than 1% of credit card fraud are being caught or sometimes it might be higher. But in reality, most of these frauds cannot be detected which is why this crime has become a favourite activity among fraudsters.
Is credit card fraud a felony?
Credit card frauds are not considered as a felony, however, it depends on the state where it takes place. In few states, this fraud is a felony and the jail term can be for year including fines. Some other states, there are shorter jail terms and fines as credit card fraud is considered as misdemeanor. However, in every case this fraud is illegal and would be liable for a penalty if caught. The federal law takes precedence is the fraud is committed interstate or by foreign entity. It immediately becomes a felony which carries more penalties compared to the states.
What can a victim of credit card fraud do?
First, contact your bank or card issuer. Always report any potential fraud or suspicion to your company so that they can take immediate action to catch the fraudster. Second, create a fraud alert so that you don’t impact your credit score due to history of fraudulent activities. Inform the law enfrocement about your stolen card as it may be a part of any continuing fraud scheme. Third, freeze your credit by contacting your credit bureaus so that you do not fall prey to credit card application fraud.
