What’s credit card fraud detection and why is it important?

According to the Federal Trade Commission (FTC), credit card fraud is the most common form of identity theft in the U.S. So it’s important to safeguard your financial information and keep an eye out for potential scams and fraudulent charges.

But even the most vigilant cardholders may encounter fraud at some point. Fortunately, credit card fraud detection can help maintain account security and reduce the chances of credit card fraud.

What you’ll learn:

• Credit card fraud detection refers to the different ways credit card companies identify and manage fraud. 

• Many credit card issuers use tools like artificial intelligence (AI), machine learning and data analysis to identify fraud. 

• Card features like fraud alerts, instant purchase notifications and text messaging can also help cardholders protect their accounts.

Credit card fraud detection describes the different ways financial institutions help prevent, identify and manage credit card fraud—which occurs when someone gets access to someone else’s credit card or account and uses it without the cardholder’s knowledge or consent.

Credit card fraud detection strategies can vary depending on the credit card issuer, but detection systems are typically digital and automatic. 

Some of the most common credit card fraud detection practices involve using AI, machine learning models and data analysis to review spending patterns and account behavior. 

If account activity falls outside the user’s typical behavior, the analysis tool can alert the credit card issuer. The card issuer can then decide whether to approve the transaction or notify the cardholder.

What’s defined as unusual account activity can vary. But examples of anomalies include: 

• Multiple transactions in a short period of time

• Sudden increases in spending

• Making a particularly large purchase

• Multiple transactions from the same retailer

• Purchases that take place in a foreign country or unusual location

• Transactions that happen at unusual times

In some cases, credit card fraud happens after someone physically steals another person’s card and uses it to make purchases. Fraud that occurs using the physical credit card is known as card-present fraud. But it may also happen through card-not-present theft, when the fraudster doesn’t have the physical card. When the card isn’t present, account information may be obtained through hacks or phishing, or it may be purchased on the dark web.

Some common methods of credit card fraud include:

• Account takeover: A fraudster takes over a credit card account through methods such as calling the card issuer and acting as the cardholder to change personal information.
• Card skimmers: A credit card skimmer is a device that can capture credit card information when it’s attached to a point-of-sale (POS) terminal or ATM where cards get swiped or inserted.
• Cloned cards: Fraudsters may create cloned, or duplicate, credit cards after obtaining card information and then use the physical cards to make purchases.
• Mail fraud: This can occur when a credit card arrives in the mail and a fraudster intercepts it before the cardholder retrieves it.

Credit card fraud could also happen through the unauthorized use of a credit card by a family member.

Modern technology like EMV chips, contactless credit cards and virtual card numbers can reduce the risk of credit card skimming, cloning or card fraud. Plus, thanks to the Fair Credit Billing Act, cardholders may only be liable for up to $50 of unauthorized charges. And some cardholders may not be liable at all.

Still, it’s a good idea to take steps to prevent credit card fraud—and act quickly if fraudulent activity is suspected or detected. Here are a few safety tips for cardholders to help prevent credit card fraud:

• Regularly monitor your accounts for suspicious transactions.
• Watch out for signs of skimmers at ATMs and POS systems.
• Avoid sharing your physical credit card details.
• Use strong passwords online.
• Keep your physical cards secure.
• Check out only on secure sites (indicated by “https”).
• Use real-time security features provided by your credit card issuer or financial institution.

Credit card companies may also implement additional, real-time security features to help users protect their data. For instance, some Capital One fraud protection tools include:

• Account alerts: You can enable automatic text alerts for potential fraudulent transactions or unusual activity. You can also opt for instant purchase notifications to receive alerts anytime a transaction is approved.
• Card lock: Card lock is a feature that enables you to temporarily lock a card that may have been stolen or lost.
• CreditWise: With CreditWise, you can keep an eye on your credit and be alerted to changes in your credit report. (For help monitoring your credit, you can also get free copies of your credit reports by visiting AnnualCreditReport.com.) 
• Virtual cards: It’s easy to create and manage virtual cards through your Capital One account. Virtual cards generate unique card numbers linked to your account for more secure online shopping. These virtual card numbers keep your physical card number protected by not sharing it with the merchant, but purchases still charge to your credit card account as usual.

Still curious about credit card fraud and how it’s detected and reported? These answers to frequently asked questions might help.

Credit card fraud detection tools and policies can help financial institutions keep their cardholders’ data safe. And security features like instant purchase notifications and fraud alerts can empower cardholders to stay one step ahead of credit card fraud. 

The Capital One Mobile app makes it easy for cardholders to manage virtual cards and access security features like card lock and alerts—all in one convenient place. Download the app to check it out and get started.