How Credit Card Companies Spot Fraud Before You Do

Advances in technology help card companies notice irregularities first.

Advances in technology help card companies notice irregularities first
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One potential problem is when card companies incorrectly flag legitimate purchases. In the worst case scenario, a customer who doesn't usually travel overseas might be on his first major international trip and have his card shut down because the card provider notices unusual activity and is unable to contact the customer directly. Usually, though, companies verify the fraud first with the customer before shutting down the card. Companies can also allow some types of transactions, like monthly automated bills, to continue for a period of time until payments can be set up on a new card.

New technology, dubbed EMV, which stands for Europay, MasterCard and Visa, is already widely used in Europe and is poised to move into the U.S. market later this year. The technology involves a computer chip inside credit cards, which creates a dynamic transaction code for each purchase – making it impossible to create counterfeit cards at the point of sale. Toward the end of this year, consumers will begin receiving these new types of cards from issuers, Conroy says.

In the meantime, consumers can take extra steps to protect themselves against what Aite describes as an increasing amount of fraud since 2011, partly a result of large data breaches. ABA's Johnson says every customer should monitor transactions regularly by checking accounts online more than once a month. "Don't wait for the monthly card statement to come in the mail," he says. He also suggests using a credit card, not a debit card, for daily and online purchases because unauthorized transactions on debit cards can affect the balance available.

Johnson adds that customers should alert their card providers to any international trips in advance to avoid having a card flagged for suspicious activity. "If you're in Europe, it's inconvenient to have those transactions questioned," he says.

[Read: How to Make Sense of a Credit Card's Terms and Conditions.]

Helwig also says you should beware of emails purporting to be from your bank that ask you to enter personal information on a website. These so-called "phishing scams" use fake emails and websites to steal personal information and money. Instead of clicking on URLs within emails, always visit your financial institution's website by typing in the URL yourself, and make sure you're on the correct website.

"Customers really still are the first line of defense, and a lot of the analytics in place rely on getting those in-bound calls from consumers," Conroy says. She checks her own accounts at least three to four times a week to make sure there are no unauthorized transactions. She also suggests being particularly careful about browsing the Internet on mobile devices. "Mobile fraud is increasing more quickly, partly because consumers don't treat their mobile devices as the tiny computers they are. Put a password on your device so if you lose it, someone can't transact," she says.

In almost all cases, banks cover the cost of any fraudulent purchases, but victims can still find themselves inconvenienced by temporarily frozen accounts and cancelled cards. That inconvenience, though, is far less off-putting then being the ongoing victim of identity theft.