How to Know When You're On the Hook for Unauthorized Transactions

NEW YORK ( TheStreet) -- There's no question that payments fraud is a worrisome issue for most consumers. It's understandable too, seeing as losses resulting from credit and debit card fraud amounted to roughly $3.6 billion in 2010 (the most recent year for which data is yet available), according to The Nilson Report.

Still, there's also no question among those in the know that consumers don't have much to worry about. Card networks and issuers offer fairly comprehensive zero-dollar liability guarantees, and federal law provides another safety net, further reducing the likelihood that you'll incur fraudulent losses.

That's not to say you're always covered. Besides, even when you are shielded from ultimate financial loss, fraud can still be a major pain to deal with. That's why it's always important to understand when you are and are not liable, what steps you can take to mitigate hassle as well as monetary loss, and which spending vehicles will protect you best.

The fraud liability landscape

Card Hub's 2013 Consumer Fraud Liability Study helped shed some light on these matters, and the following are among its main findings:
  • All four major card networks -- Visa (V), MasterCard (MA), Discover (DFS) and American Express (AXP) -- boast $0 liability guarantees for unauthorized credit card transactions and signature debit card transactions.
  • Consumer liability for PIN debit transactions depends on the card network as well as the manner in which the transactions are processed. Discover extends zero-dollar liability to debit card purchases "verified" by PIN, and American Express does not offer debit cards with PINs. Visa cardholders are covered only for unauthorized PIN debit transactions processed over Visa's network, but consumers have no way of knowing how a given transaction will be processed. MasterCard does not provide additional liability coverage for PIN debit transactions.
  • While Discover and American Express don't hold customers liable for unauthorized ATM transactions, they account for a tiny portion of the ATM market. Visa and MasterCard policy pertains to most people, and those particular networks don't provide liability protections on top of what may be available from issuing banks and federal law.
  • Federal law limits liability for unauthorized credit card and debit card transactions to $50 when reported within two business days and $500 when reported within 60 days. If you don't report suspicious account activity within 60 days, you may find yourself unprotected.

What this means for consumers

It's possible to glean a number of important insights from the state of the fraud liability landscape, including the fact that higher profit margins have led card networks to promote signature verification for debit card transactions, even though it's more susceptible to fraud than PIN verification. While interesting, you're probably more concerned with garnering a roadmap to fraud avoidance than insights into the inner-workings of the payments industry.

With that in mind, here are four steps you can take to minimize your susceptibility to fraudulent losses:
  • Use a credit card as much as possible: Blanket fraud liability coverage from the major card networks isn't the only benefit to making a credit card your primary spending vehicle, though it's a very important one. Credit cards also make fraud easier to stomach from a psychological standpoint since you don't have to actually spend any of your own money until at least 21 days after your monthly statement becomes available. In other words, you'll have plenty of time to notice and sort out fraud before you become financially invested. With a debit card, on the other hand, funds are removed from your account in real time. You might therefore have to: deal with the shock of seeing an unexpectedly empty bank account; actually work to get your money back; and manage the ripple effect of bounced checks or a lack of funds for other obligations.
  • Sign for debit card purchases: While about 85% of debit card fraud involves signature "verification," merchants and card networks are the ones liable for it, not you. The same cannot be said for PIN transactions, which means it's in your bank account's best interest to sign rather than input your four-digit code when using a debit cards.
  • Monitor your accounts: It's always best to notify your card's issuer quickly of any fraudulent activity, especially since your ultimate liability depends on it in certain situations. Reviewing account activity on a weekly basis will enable you to react quickly if your account ever gets compromised.
  • Exercise common sense: Doing things such as updating passwords regularly, not clicking on suspicious emails, being cautious about sharing financial information online, shredding financial documents before throwing them out and filling out the tip field on bills to prevent uncertainty will make it significantly more difficult for fraudsters to target you.
  • Exercise common sense: Doing things like regularly updating passwords, not clicking on suspicious e-mails, being cautious about sharing financial information online, shredding financial documents prior to throwing them out, and filling out the tip field on bills in order to prevent uncertainty will make it significantly more difficult for fraudsters to target you.

Now that you possess a better sense of how fraud impacts the payments industry, as well as what measures you can take to safeguard your finances, I have one final message for you. Relax! Fraudulent losses pose far less of a risk than the local news would have you believe, so stop worrying so much and instead focus your efforts on paying off debt and living within your means.

Odysseas Papadimitriou is CEO of Card Hub, a leading website that conducts personal finance industry research and helps consumers find the best credit cards for their needs.

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