Credit card fraud is a problem that affects one in 10 Americans and costs us all in the long run.  Even though, under federal law, you’re only accountable for up to $50 of fraudulent charges, that still means that the credit card companies are on the hook for millions.  So, it’s in their interest to keep an eye out for possible fraud. And they’re getting so good at it.

How?  Computers, databases, and psychological profiling.  Here’s the anatomy of spotting, and stopping, a fraudster.

First, we have to talk about your card’s history.  People tend to use credit cards in certain ways: for example, you may use one card pretty much exclusively for gas and groceries, or you may use one to shop online.  That data is put into a database, and each purchase is compared against it as you use it.  This sets up your card’s “behavior pattern,” if you will: how it’s used, where it’s used, and so on.  These tend to be pretty reliable; most of us are fairly set in our ways, or at least our spending habits.

Now, imagine that your card information is stolen.  This can be done in any number of ways: credit card skimmers attached to gas pumps, database breaches of vendors, and so on.  The point is, the thief now has a credit card.  What he doesn’t have is any real information about that card.  In fact, depending on how he got it, he doesn’t even know if it still works.  So, he has to try it out, and he has to act quickly once he knows it’s valid.  This is called a “testing charge.”

Thieves tend to do this in a few ways.  If they have just the card information, they’ll generally go online and, for example, buy an MP3 or two: something cheap and easy to download that tells them the card is valid.  Or, if they have a cloned card — or even your actual card — they’ll buy gas.  Gas can be bought without interacting with a person or being caught using the card on video.

Thieves tend to get away with this first purchase, as it’s not all that suspicious. What tends to set off red flags is what they do next.  Credit card thieves tend not to use the cards for personal purchases: they tend to use them to get items that can easily be fenced.  So, if, say, a thief goes to a gas station, and then goes straight to a hardware store and buys $2000 worth of power tools, that will immediately trigger a call to the cardholder.  It’s so quick, thieves are sometimes caught in the parking lot.

Needless to say, these are only the (relatively) smart thieves.  Overseas, some of the dumber ones shut down the cards they steal by making out-of-country purchases.  If you make a purchase in America, and suddenly make another five minutes later in Uzbekistan, that will raise a few eyebrows.  Even purchases made outside of the state in which you live can be monitored.

Most of this is done exclusively by computer: the behavior trips a warning in the system, and the computer flags a human to call you and verify the charge.  Sometimes, a human will look at the purchase history as well. 

Sure, it can be annoying when your credit card company calls to verify purchases. Or worse, temporarily suspends your card because of suspicious activity. But look at it this way: they’re looking out for you, and thus for your credit score.

 

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Tags: Card, Credit Card
Posted January 17, 2012 by Hanna Silver under Global Finance

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