If you use the headlines as a guide, credit and debit card fraud has never been scarier. We have seen massive data breaches at Target (TGT) and Home Depot (HD), reminding us of our vulnerability in a digital world. Clever hackers can steal the personal information of more than 100 million shoppers with relative ease.
How do you defend yourself in a world where mega-breaches seem to be increasingly frequent? Americans are still carrying plastic in our wallets that uses a magnetic stripe to store our personal data. This technology was invented in the 1950s, and fraudsters have had more than 60 years to create ways to steal that information in the physical world. And every new digital or online payment tool creates the opportunity for further theft. If you link an account to a digital payment company (like PayPal), you become dependent upon the security of both PayPal and your bank. The more complicated and elaborate the web of payments becomes, the greater the potential for vulnerabilities that can be exploited by clever fraudsters.
You should think about fraud in three ways:
Prevention.What can you do to make sure fraud never happens?
Detection. If fraud happens, how can you find out as soon as possible, to minimize the size of the potential theft?
Resolution. If you do lose money, how do you make sure you get it back?
There are two ways that you can get into trouble:
Someone takes over your identity and opens up a new account using your name and credit information (identity takeover).
Someone takes over one of your existing accounts and starts spending money (account takeover).
To prevent identity takeover, you need to guard your personal information. And the most critical piece of information is your Social Security number. Once someone gets hold of those nine digits, they can really make your life difficult. Avoid writing it down on paper. (Feel free to say no at the doctor's office, or almost anyplace else that requests it.) Never make it your username. And don't store it on your phone.
To get the highest level of prevention, you can "freeze" your credit report. For a small fee (you will need to do it at each of the three major credit bureaus), you can prevent any new accounts from being opened. You will be given a PIN code that can be used to unfreeze the accounts, if you plan on applying for credit. (There's a how-to guide on my website, MagnifyMoney.)
Account takeover is easier to accomplish than identity takeover. Fraudsters can steal your information in the physical or digital world. Skimming is one of the most common methods for stealing your data. A skimmer is a device that reads the information from your magnetic stripe. There are hand-held devices (that a waitress can use), and there are even devices that can be attached to ATMs.
If a waitress or some other service professional wants to skim your credit card after you've handed it to them and they've left your sight, it is almost impossible to stop them. However, you can take steps to prevent ATM skimming:
Avoid suspicious ATMs. I only use ATMs inside a bank branch, where cameras are present.
Use your hand to cover the keypad when you type in your PIN code. One common fraud technique involves a small camera hidden nearby, recording you inputting your PIN.
Beware out-of-hours devices at branches, where you swipe your card to unlock the door. Fraudsters are increasingly adding skimming devices here.
Online bill paying can also be a risk. If fraudsters steal your sign-in credentials, they can issue payments to bogus payees. The best way to prevent this is to have a high level of security around the addition of a new payee. A good example is Bank of America's (BAC) SafePass. To add a new payee, you need a code from a physical device that only you have. But, at a minimum, you should receive email notification every time a new payee is added and every time a payment is made.
Avoid web cafes and public computers, as they are sometimes infected with malware that enables fraudsters to see everything on your monitor.
Stolen or lost wallets and phones remain the preferred ways for fraudsters to get access to your money. Never carry more credit cards than you need to in your wallet. Never write down a PIN code, password or Social Security number anywhere in your wallet or on your phone. And don't leave your wallet in your hotel room, waiting for housekeeping to pilfer it.
No matter how vigilant you are, there's always a risk that you'll be a victim of fraud. Your best defense is early detection. And the best way to detect identity takeover is by regularly looking at your credit reports and signing up for a credit monitoring service.
Every year, you should get a free copy of your credit report from all three bureaus by using AnnualCreditReport.com.
You can sign up for ongoing credit monitoring for free from CreditKarma.com. It only looks at TransUnion, but it is free.
To detect an account takeover, make full use of tools that alert you to transactions. These include:
Setting your account so that you receive an email or text for any transaction above a certain dollar amount.
Setting your account so that you receive a daily message that shows your balance.
In addition, banks use detection algorithms to identify suspicious transactions. The best banks will send you an email or a text alert, asking you to verify.
Once you detect fraud, your goal is to stop the fraudster from being able to steal more money and to get any money back that you lost.
As soon as you detect fraud, immediately call the bank. If you don't report your fraud to the bank within 60 days, you lose a lot of your legal protections.
I know it can seem scary, but this is a risk that you can manage. Here is what I do:
I keep as little money in my checking account as possible. That is the account with the most potential for theft (money can exit the account via a debit card, ATM card, check, bill pay or online account like PayPal).
My emergency savings is in a certificate of deposit that is not linked to my checking account. If someone wants to get at that money, they have to break the CD, which takes time. And I would receive plenty of warnings and alerts along the way.
I only use my debit card one to two times per month, to withdrawal money from an ATM. And I only use a bank ATM during business hours.
I have an alert set up so that I am notified any time any transaction takes place in my checking account.
I make all of my monthly purchases on a credit card, and I receive a daily text message showing my balance.
I don't carry my back-up credit cards with me. They are locked away at home.
I check all three credit reports annually, and I have credit monitoring so that any new account inquiry is sent to me via email.
I don't panic if fraud strikes me. And it has (always on my credit card, never on my debit card). And I have never lost a dollar of my own money on fraud.
Nick Clements is the co-founder of MagnifyMoney.com, a website that makes it easy to cut your costs without cutting your lifestyle. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the U.K.
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Yes they can.
The CARD Act did get rid of the most outrageous abuse: they can no longer increase the interest rate on existing balances unless you go 60 days past due.
However, you need to remember that:
Most credit card interest rates are variable and are linked to the prime rate. Your high rate will only go higher when interest rates increase.
Based upon risk, your credit card company can still increase your interest rate on all future purchases. Your existing balances are protected, but future purchases would be at the higher rate. And determining risk is not limited to your behavior on your existing card. If you miss a payment with another lender, that could lead to an increase on all of your credit cards.
After 12 months, they can increase your rate for almost any reason. But the increased rate only applies to future purchases, and they need to give you 45 days notice.
Credit cards are incredibly expensive ways to borrow money. If you use a card, your goal should be to pay off the balance in full every month. Then, the interest rate doesn't matter.
Bottom line: If you do have debt, you should never be paying the purchase APR. Look for a balance transfer, or get a personal loan to cut your interest rate. And take a long hard look at your spending to put more money towards paying off that debt.
No, they are not.
There is a big difference between a 0% balance transfer (where the interest is waived during the promotional period, discussed above) and 0% purchase financing offered at many stores (where the interest is only deferred).
I regularly encourage people to use balance transfers to help them pay off their debt faster. With a balance transfer, interest is switched off or reduced during the promotional period. Once the promotional period is over, interest starts to accrue on a go-forward basis. This can take years off your debt repayment.
But stores offer 0 percent financing at the checkout. With a lot of these programs, interest is charged from the purchase date if you do not pay off the balance in full during the promotional period. So, if you have a 12-month 0 percent offer -– and do not pay off the balance in 12 months -– then in month 13 you will be charged a full 13 months of interest. They retroactively charge interest, and it will be like you never had a 0 percent offer at all.
This is a common practice. Online, Apple (AAPL) does this, via their partnership with Barclaycard (BCS).
Bottom line: I don't like deferred interest deals. Most people do not understand the difference between waived and deferred interest, and this practice feels deceptive. If you take one of these offers, make sure you pay off the balance in full before the promotion expires.
Credit card companies have different rates for different types of transactions. The interest rate charged on a purchase (high) is different from a balance transfer APR (low).
Before the CARD Act, banks would apply your payment to the lowest APR balance first. Imagine you have a $1,000 balance. $500 is at 0 percent (balance transfer), and the other $500 is at 18 percent (purchase). If you make a $100 payment, banks would apply that to the balance transfer. That way, they reduce the balance transfer (at 0 percent) to $400, while protecting the $500 purchase balance (at 18 percent).
The CARD Act changed that. Banks now need to apply payments to the highest interest rate first. But this only applies to payments higher than the minimum due.
If you only pay the minimum due every month, your payment will still likely be applied to the lowest interest rate balance first.
Bottom line: You should never spend and have a balance transfer on the same credit card. Banks can only "trap" balances when you have multiple balance types on one card.
Not exactly true.
The CARD Act has stopped the handout of T-shirts on the steps of the school libraries, but they can still give sign-on bonuses. And they advertise on campus. For example, Citibank (C) has a "Thank You Preferred" card for college students. If you spend $500 in the first three months, you get 2,500 thank you points as a bonus. That is $25 of value.
Bottom line: I actually find this worse. Before, you got a free T-shirt just for signing up. Now, the credit card companies encourage spend on the card for the "free gift."
In the past, banks would charge you a fee if you went over your credit limit. Today, the CARD Act requires banks to receive your consent to charge an over-limit fee. So, in most cases, banks just eliminated those fees -- which is good news (kind of).
You can still go over your credit limit, if the bank approves your transaction. But the full amount by which you've exceeded your limit will be part of your minimum payment come the next bill, which could cause a payment shock.
More importantly, utilization (the percentage of your available credit that you use) is a big factor in your credit score. Your credit score determines the price you pay for credit. So, if you're over-limit on an account, you are considered riskier. That can result in the credit card company increasing your interest rate. And it could also result in other lenders increasing your rates with them. So you do pay, but it's an indirect cost.
Bottom line: We're glad the fee is gone, but you still need to be diligent and try to avoid going over your limit. If you pay your balance in full every month but are frequently bumping up against your credit limit, ask for a credit line increase.
I have heard from so many people that the way to eliminate overdraft fees is to opt out of overdraft protection. But it is impossible to completely opt out of overdraft.
Federal regulation requires consumers to opt into overdraft protection only for debit and ATM transactions.
But, the regulation does not cover checks and electronic transactions (including bill-pay and monthly direct debits, like gym memberships). The banks have all the power. If they approve the transaction, you would be charged an overdraft fee (typically $35 per transaction at banks and $25 at credit unions). If they decline the transaction, then you would be charged an NSF fee (non-sufficient funds), which is usually just as expensive as the overdraft fee.
Bottom line: You can't opt out of all overdraft fees. To avoid them, keep a buffer or find an account, like Ally, that doesn't charge those junk fees.
Not always true.
To be protected, you need to report the fraudulent transaction within 60 days. Otherwise, you give up a lot of your rights.
On ATM/debit cards, the bank can make you responsible for up to $500 of fraud if you report more than two days (but less than 60 days) after the transaction. On a credit card, you would never be liable for more than $50 (and most banks won't even hold you accountable for $50.)
One area where you will almost always lose is when your Personal Identification Number is used. If someone manages to get your PIN and takes money out of your account, then the bank will almost always assume that you authorized the transaction. Make sure you change your PIN often and never write it down.
Bottom line: Avoiding liability it your responsibility. Track your transactions regularly and call as soon as you detect any suspicious activity. And make sure you never share your PIN with anyone, or make it obvious.