How to Beat Credit and Debit Cards ID Thieves

Hal Bundrick
March 11, 2014

Nearly half of Americans say they’re extremely concerned about their personal data when shopping in stores with debit and credit cards, AP reports in a recent poll.

And they should be.

Identity theft has been the leading consumer complaint for 14 years in a row, says a new report from the Federal Trade Commission. With recent data breaches at Target, Neiman Marcus and other retailers, that concern isn’t likely to decrease any time soon.

Here’s how to handle problems.

Data breaches.  After a hacking, most retailers and credit card issuers will notify their customers. Take the notification seriously: Last year, one in three consumers who were notified of a data breach became a victim of fraud, says Javelin Strategy & Research, a consulting firm. Companies typically offer fraud monitoring and other services for free to victims of a breach. If you’re offered these services, say yes.

Credit and debit card issuers also monitor users’ habits for patterns so that they can spot potentially fraudulent activity. They’ll often proactively suspend a card after a suspicious purchase until receiving confirmation from the cardholder. While such monitoring can be annoying to some users, it helps to keep fake charges to a minimum.

You’ll also want to monitor your own accounts for unauthorized charges. Set up phone alerts with your card issuer or bank to receive a message for transactions above a certain amount. Some homeowner and renter insurance policies cover card fraud liability. If you’ve suffered a major financial setback due to unauthorized charges, it’s worth a call to your insurance agent to see if you’re covered.

Related: Your Phone Hasn’t Replaced Your Wallet - Yet

If you think you’ve been a victim of fraud (or if your cards have been physically lost or stolen), call your card issuer immediately – most have call centers dedicated to fraud 24/7. You’ll also want to follow up with a written report to the issuer regarding the unauthorized charges. However, your liability depends on the type of plastic used.

Credit cards and charge cards. Credit cards offer the greatest shield against fraudulent or unauthorized charges—a fraudster who goes on a spending spree with your credit card is spending the bank’s money, not yours.

If your card is lost or stolen, and you report it before the card is used, you’ll have zero liability. If charges are made on the card before you have an opportunity to report them, your losses are legally limited to a maximum of $50. Some providers offer even greater protection: “Zero liability” fraud protection is now commonly offered by Visa and MasterCard to calm consumer fears of fraud, though some restrictions may apply.

Debit cards. Since your debit card is connected to your bank account, criminals who get hold of these cards can cause the most damage the most quickly. You may not notice your account has been drained until you have insufficient funds to make a purchase.

If you notify your bank within two business days, you can’t be held responsible for more than $50 in charges on a debit card. After that, your liability under the law can rise to $500 or more.

Most banks want to keep their customers satisfied and won’t enforce strict time limitations on reports of fraud if they believe you did all you could to avoid and report the loss in a timely fashion. However, if you wait more than 60 days after receiving your statement to make a report, there may not be a limit on your liability.

Related: Key Takeways from the Target Credit Breach

With a prompt report of fraud, you can limit your liability, but not the hassle. While the bank investigates the matter, the charges in question can, in some cases, result in a “provisional” hold for weeks on your account for the amount involved in the dispute. (By contrast, fraudulent charges on a credit card tie up the card issuer’s assets, not yours.)

Prepaid cards. Prepaid cards have become an increasingly popular form of payment. The Pew Research Center says consumers loaded $64.5 billion onto prepaid cards in 2012, up from just $28.6 billion in 2009. The cards are a handy financial tool, allowing direct deposit of wages, cash withdrawals from ATMs, and the convenience of shopping with plastic.

Despite their convenience, though, prepaid cards offer the least protection against fraud (although you’re never liable for more than the dollar amount held on the card). Issuers don’t provide pro-active fraud monitoring, since most cards don’t offer enough user history to find patterns and detect suspicious activity.

While all the major prepaid card providers offer some level of liability protection after unauthorized charges, the protection can range widely from one provider to another. If your prepaid card has a Visa, MasterCard, American Express or Discover network logo, you will likely have enhanced fraud safeguards.

For example, American Express requires reports of fraud to be received within 60 days of discovery to eliminate cardholder liability. Visa, MasterCard and Discover also waive liability to consumers for cards in “good standing” as long as cardholders have used “reasonable care.” There can be restrictions, though. It’s a good idea to read a prepaid card’s liability policy before purchasing.

Payroll and gift cards are also considered prepaid cards, but again, fraud liability varies. Gift cards have no limit to your liability under federal law. However, if you use a payroll card, fraud security will generally be similar to a debit card.

Hal Bundrick is a Certified Financial Planner™ and former financial advisor and senior investment specialist for Wall Street firms. He writes about personal finance and investing for NerdWallet

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