Credit Card Fraud Detection: How To Spot & Avoid Fraud

November 17, 2023

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    What Is Credit Card Fraud (How Bad Is It)?

    Credit card fraud is the unauthorized use of a credit or debit card to fraudulently obtain money or property. Credit cards can be physically stolen out of your wallet or obtained virtually from unsecured websites, data breach leaks, or identity theft schemes.

    For example, in 2019, hackers broke into Capital One databases and released the credit card information of over 100 million people [*].

    What can scammers do with stolen credit cards?

    Credit card fraud broadly falls into card-present and card-not-present (CNP) scams. Of these, CNP scams are shockingly easy to implement. A stolen identity and credit card information are all that a scammer needs.

    Here are the top reasons why credit card fraud is so widespread in the U.S:

    1. Most elaborate credit card scams are automated and highly industrialized.
    2. The Dark Web has opened up criminal ecosystems that didn’t exist before.
    3. Small businesses that collect payment information lack security measures to protect against fraudulent activity.
    4. Most credit card fraud goes unnoticed after financial institutions clear fraudulent credit card transactions.
    5. Credit card fraud is cross-jurisdictional. Law enforcement will not pursue these cases unless there are severe damages.
    6. Card networks stand to make gains from merchant chargebacks, so they have no incentive to prevent bogus charges.

    Luckily, federal laws have strong protections in place for cardholders. If your card is lost or stolen, you may only incur a penalty of up to $50 as long as you notify the bank within two business days. In most cases, you are not held liable for charges made on the credit card after you’ve reported it missing.

    In addition, all major card networks — Visa, Mastercard, American Express and Discover — offer $0 liability guarantees for unauthorized transactions. These safeguards are probably why Americans choose credit cards as their primary spending vehicle.

    What Is Credit Card Fraud Detection?

    Credit card fraud detection encompasses a set of tools or activities that help prevent fraud. This could include anything from fraud alerts sent from a credit monitoring service to the advanced tools that online payment processors use to detect fraud.

    There are two ways that credit card fraud gets detected:

    1. How credit card companies and payment processors detect fraud: Retailers and payment processors have more to lose if they get scammed by stolen or fake credit cards. Online payment processors have invested millions in developing algorithms that use artificial intelligence (AI), machine learning, neural networks, and massive datasets to check the validity of credit cards in real time. Needless to say, there’s a lot of technology behind detecting fraud.
    2. How cardholders can detect credit card fraud: Even with the latest technology, credit card fraud still happens. Individuals can become their own fraud detectors by identifying fraudulent charges or strange activity on their accounts and credit file.

    Even with cardholders and companies searching for fraud, there’s no way to stop it completely.

    The 10 Most Common Types of Credit Card Fraud

    One of the most practical steps that you can take to protect your credit cards is familiarizing yourself with the types of fraud and how they work. Scammers and card thieves are constantly looking for new ways to circumvent fraud detection methods, so vigilance is your best defense.

    1. Lost or stolen cards

    Keep your cards physically safe. If you lose or misplace your card, report it immediately. A thief with your card can use it just as easily as you would. Normal transactions at a point-of-sale (POS) terminal might be impossible without a PIN.

    But even without your PIN, a thief can still pay online using the card information or use it at stores that only require a signature.

    2. Card-not-present (CNP) fraud

    Aite-Novarica Group chart about about losses from U.S Card-Not-Present fraud from 2018–2023; estimated 2023 losses is $9.2B
    Card-not-present transaction volume increased 25% to 30% from 2019 to 2020. Losses from CNP transactions are expected to hit $9.2 billion this year. Source: Aite-Novarica

    Card-not-present (CNP) fraud happens when a thief makes a fraudulent transaction without needing to show a card — typically over the phone or on the internet. These are the easiest transactions to make for someone using a stolen identity, since a thief only needs your credit card number (as opposed to a physical card).

    In rare cases, thieves may even use CNP fraud to pay for in-person purchases that they later pick up.

    3. Skimmed and “shimmed” cards

    Identity thieves “skim” cards to secretly capture payment and personal information. From simple photocopies to more sophisticated skimming devices, there are various ways thieves can steal your information.

    These skimmer machines act like typical POS terminals while extracting card information from a magnetic strip or microchip. Some skimmers can even stealthily fit into ATM machines and gas pumps.

    4. Counterfeit, doctored, or faked cards

    With your credit card number and a card encoding machine, a thief can create a fake credit card that can be used at any store. Usually, scammers use skimmed card information that they then encode into a counterfeited, faked, or doctored card.

    IN THE NEWS: In February 2022, a U.S. District Judge sentenced a 46-year-old scammer to five years in federal prison for bank and wire fraud. Card manufacturing machines, hundreds of fake credit cards, and stolen checks were recovered. These counterfeit cards were used as secondary identification for the scammer to cash checks.

    5. Phishing calls pretending to be from your bank

    A phishing call is a phone call in which the caller impersonates a trustworthy source. For example, an identity thief who claims to be from your bank or even Amazon might call to steal information.

    Just recently, Ohio saw a surge in these Amazon phishing scams. Directing recipients to enter their credit card information, an automated call pretended to be from Amazon’s fraud prevention wing confirming there were no fraudulent transactions on the victims’ accounts. Cyberattacks like these prey on human emotions such as fear or surprise to take advantage of victims.

    6. New credit card application fraud

    With application fraud, thieves use your personal information to apply for new credit cards in your name and then max them out as quickly as possible. They need surprisingly little data to apply for and receive a card in your name — just a valid name, birthdate, address, and Social Security number (SSN) are all that it takes.

    Related: →

    7. Data breaches that leak credit card information

    The number of data breaches in 2021 was 23% higher than the previous all-time high. There were also more cyberattack-related data compromises last year than ever before. Personal data like your name, phone number, account logins, and even SSN and credit card numbers may be exposed in such leaks.

    Bad actors can use this data themselves or sell it on the Dark Web. These are web pages that are part of the deep web, hidden from search engines on the “surface web” that we’re familiar with.

    8. Online banking account takeovers

    In an account takeover, a hacker logs into your credit card account — and locks you out. The login data could come from phishing emails, malware, or any one of thousands of websites across the entire Dark Web posting breached data.

    More than one in five American adults have been victims of an account takeover, with the most common being social media and online banking takeovers.

    9. Man-in-the-middle attacks (hacked Wi-Fi)

    Public Wi-Fi networks, like those found at coffee shops and airports, put your credit card at risk. A hacker can connect to the same router and use special software to intercept traffic, collecting your credit card data in the process.

    In other cases, scammers may intercept email communications and give you false bank account information to steal your money.

    10. Intercepting cards in the mail

    If you apply for a new credit card or get a replacement card, monitor it carefully. Never leave a new card waiting for days in the mailbox — anyone can easily access these cards and commit fraud. In fact, fraudsters may specifically target people who don’t have the USPS® ​​Informed Delivery® service, knowing their mail can be easily monitored and intercepted.

    Also be wary of missing mail — especially replacement credit cards or bank statements. Fraudsters can use a change-of-address scam to reroute your mail to their address. Then, when they request  a replacement card “for you,” it goes right to them.

    Credit Card Fraud Prevention: 12 Essential Steps

    We’ve reviewed some of the most common scams that fraudsters use, as well as how your credit card company can help protect against these scams. Besides relying on your bank or federal laws, here are some practical steps you can take to protect your credit cards.

    1. Monitor credit card statements and credit reports

    If you don’t already review your credit card statements each month, now is the time to start. Look for any unfamiliar charges — no matter how small. Fraudsters often start with small transactions to "verify" your stolen credit card numbers (this is called "carding").

    You can also log into your account to review recent purchases more frequently.

    Your credit report is another document to monitor diligently. It’s a list of your credit details, including all your loans and credit cards, any requests for more credit, and your credit history.

    If a thief tries to apply for a loan in your name or rack up debt, you can spot it on your credit report. By law, each of the three major credit bureaus (Experian, Equifax, TransUnion)is required to share a free report with you every year. Request yours at their official website today: AnnualCreditReport.com.

    2. Verify companies before you buy from them

    Lingering effects of the pandemic — supply shortages and shipping delays — have made outlier online retailers more popular. These less reputable, less secure websites are prime territory for credit card fraud.

    When shopping online, look to buy from reputable stores. Seek out known brand names and companies you’ve heard of before. If you’re in doubt, check for a working business phone number and email along with a physical location that isn’t just a PO Box. As an additional safeguard, check company ratings by visiting the Better Business Bureau (BBB).

    The FBI recommends paying careful attention when buying internationally. Once you send money to another country, there is usually no way to get it back.

    3. Don’t ignore account or purchase notifications

    Keep an eye out for email or password change requests on any of your online accounts. It could be a warning sign of an account takeover.

    Multi-factor authentication (MFA) asks for more verification methods beyond a username and password. Consider setting this up for all your accounts to decrease the likelihood of a successful cyberattack.

    Also, most banks and credit card companies can alert you about purchases over a certain amount. Select a limit that makes sense for you, like $25. This way, you get notified immediately about any suspicious activity on your card.

    4. Beware of unusually enticing offers

    Scammers know what offers catch our attention. If you get a call or text from your credit card company offering a better rate or more credit, beware. Unsolicited calls like that are usually scams. Always hang up and call the official number on the back of your card or on the bank’s website.

    Sometimes, the messages don’t even need to be about your credit. Keep an eye out for any kind of special offer that seems enticing. For example, a recent scam involved emails promising “exclusive rewards” from Costco and T-Mobile.

    5. Report unsolicited cards in the mail

    If you get a credit or debit card in the mail that you didn’t apply for, take action immediately. It could be a sign that someone has applied for credit or a bank account in your name. As soon as you suspect fraud, pull credit reports from Experian, Equifax, and TransUnion to check for unauthorized activity.

    6. Safeguard your credit and debit cards

    Keep your cards in the same place at all times (like a particular section of your wallet or purse). The fewer places your card could be, the more sure you will be when it’s lost.

    If you’ve lost your card, immediately report it to the credit card company. Even if you find the card under the couch a few days later, it’s better to get a new card than risk theft.

    Also pay attention to how you store your card data. If you have a photo of your card on your iPhone, then your data is at risk if your phone is stolen or your cloud account gets hacked. If you must store card data on a mobile device, use an encrypted note or a password manager.

    Finally, it’s common to hand your credit card to a waiter or barista to fulfill your order, but avoid it whenever possible. Virtual cards mask your real card number so your card information is always safe. Consider requesting a virtual card from your bank today.

    ⛳️ Related: Is It Bad To Have Too Many Credit Cards?

    7. Sign up for Dark Web monitoring

    Major data breaches happen every few months, but most of us don’t spend time reviewing whether each breach has included our data or not. And even if we wanted to, Dark Web monitoring requires access to browsers like Tor that hide your IP address.

    That’s why one of the best fraud detection methods is a Dark Web monitoring service. Choose the information you’d like to monitor, and the service will scan deep web forums, known databases of stolen data, and more to notify you of breaches.

    8. Use mobile payments whenever possible

    Modern payment options, like wireless or mobile payments, are safer than credit cards. Credit card numbers stay the same, but mobile payment apps generate unique, one-time numbers for every transaction. Even if an identity thief were able to steal your information, it would be worthless for a future transaction. Virtual payments also reduce the risk of credit card skimming.

    9. Shred documents with personal information

    Even with advances in cybercrime, “dumpster diving” still proves successful for identity thieves. Shred any mail containing personal or financial information. Even junk mail, such as pre-approval letters, can tip off thieves that you have good credit and would make a valuable target for them.

    On the list of other sensitive documents to shred are also these:

    • Expired credit cards
    • Obsolete financial documents
    • Family medical records
    • Tax preparation worksheets
    • Canceled checks
    • Bank statements
    • ATM receipts
    • Utility bills
    • Insurance forms
    • Copies of driver’s licenses or passports

    10. Learn how to identify phishing calls or texts

    Never trust an incoming call or text, even if the caller ID says it’s from your bank or the IRS. Scammers can create fake caller IDs and may even know (having stolen it) information about you. Instead, hang up and call the official number.

    It’s also critical to know that financial institutions won’t chat with you about your account through private messages on Facebook, Instagram, or another social media platform.

    ⛳️ Related: Snapchat Scams: Don't Fall for These 7 Insidious Scams

    11. Conduct transactions on trustworthy websites

    Before entering credit card data or other personal information on an e-commerce website, make sure you have a secure connection. Verify this by checking if the website URL starts with “https://” instead of “http://” — the “s” stands for “secure.”

    Modern browsers — Google Chrome, Firefox, Microsoft Edge, and mobile browsers on Android and iOS — all verify secure connections, usually with a padlock symbol. Refrain from saving any sensitive information directly to your browser. A safe alternative is a password manager.

    Further, vet unfamiliar websites by searching their names online with “scam” or “complaint” appended to your search.

    12. Practice secure browsing

    When you’re on the internet, you never know who else could be trying to intercept your connection. That’s why it’s a good idea to use a Virtual Private Network (VPN) when browsing. VPNs help you stay private online with an encrypted connection to the internet. This is a must-have if you often use public Wi-Fi.

    A quality antivirus software is also recommended to protect your devices from malware. Allow automatic software updates to keep your devices and data safe.

    What To Do if You’re a Victim of Credit Card Fraud

    If you believe your identity has been stolen, take quick action to protect yourself. Here are three key steps to take if you suspect credit card fraud:

    1. Alert the credit card company. Call the fraud department at your credit card company and explain the problem. Follow up with a detailed letter stating how you spotted the fraud along with a list of fraudulent transactions. Cancel any compromised cards.
    2. File an FTC report. File a report with the FTC (Federal Trade Commission) at IdentityTheft.gov. You’ll then receive a report that you can also share with your credit card company.
    3. Create a credit fraud alert. Contact one of the three credit bureaus and request a fraud alert. Each bureau must share your alert with the others. You can also request a credit freeze. This denies all credit and must be placed with each bureau separately.

    Credit Card Fraud Detection: The Bottom Line

    Keep an eye out for these common scams, and never share your credit card number or personal data via incoming calls or texts. Sign up for notifications in case of data breaches, hacks, or sensitive data leaks on the Dark Web.

    Verify any alerts with the official contact number of your credit card provider. Review your transaction data often, and set up purchase limits. Create strong passwords, and use multi-factor authentication (MFA) wherever possible.

    And for added security, sign up for credit monitoring and identity theft protection from Identity Guard.

    Special offer: Save 33% on your Identity Guard membership.

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    1. Financial identity theft and fraud
    2. Medical identity theft
    3. Child identity theft
    4. Elder fraud and estate identity theft
    5. “Friendly” or familial identity theft
    6. Employment identity theft
    7. Criminal identity theft
    8. Tax identity theft
    9. Unemployment and government benefits identity theft
    10. Synthetic identity theft
    11. Identity cloning
    12. Account takeovers (social media, email, etc.)
    13. Social Security number identity theft
    14. Biometric ID theft
    15. Crypto account takeovers