These days all you ever hear about is how evil credit card companies are. They jack up fees, cut your credit limit, and change your interest rate in the blink of an eye. Recent legislation, popularly called the Credit Cardholders’ Bill of Rights t has put measure in place to address many of those complaints. As “evil” as credit card companies are, we find huge value in their services. Personally, I like the convenience, expense tracking, and security that comes with it.
Let’s talk about that security. When you sign up for a credit card you are surely pitched all their security and fraud monitoring services that come “free” with the card. First of all, don’t think that any of this is really there to help you. Because of ID theft laws you aren’t held responsible for fraudulent transactions, the credit card company is*. In other words, it’s in their best interest to catch fraud quickly so they can close the card.
But how do you catch card fraud? Your credit card can be stolen and you may go a week or so before you notice it’s gone. The card companies use sophisticated algorithms that come from decades of data collection. By compiling statistics from stolen card purchases, they can identify potential fraud in 2 or 3 transactions. This is done in a number of ways. First of all certain zip codes, neighborhoods, or even stores are known for more frequent transactions with stolen credit cards. Say you work in the financial district of New-York City and regularly buy your day-to-day stuff, including clothes, in the area. You’re sitting outside with your buddy and your wallet gets stolen but you don’t notice it. 3 hours later you get a text message from your card company asking if your card has been stolen. You discover it is gone and call the card company. You ask how they learned before you did.
The card company knows you buy most of what you need in the financial district but all of a sudden you’re making purchases in Jersey City just on the other side of the Hudson. The fraud team knows this is odd because you’ve never purchased anything there. Secondly, your card purchased gas in Jersey City. Since you’ve lived in Manhattan for over 2 years they know you don’t buy gas often and when you do it’s coupled with a car rental. Then groceries were bought at a store in a neighborhood where the crime rate is high and card theft purchases show up there 50% more frequently than the average for the area. Finally the cardholder took out a cash advance of $500. In 4 years with the card, you’ve never taken out a cash advance. A text message is sent automatically to you, you call, and the card is placed on hold.
Sometimes it’s even easier than that. Though the content of these algorithms is a closely guarded secret for good reason, I’ve heard an example or two over the years that are actual monitored patterns. My favorite allows the card company to identify potential fraud in 3 transactions, regardless of location and prior buying habits: two tanks of gas and a pair of shoes. Why? Who will buy two tanks of gas on the same day in the same location at the same time? Someone who has someone else’s card and wants to fill up their tank and a buddy’s. The shoes make me laugh but it’s a consistent pattern apparently.
But it’s not always your card that’s stolen. Many times it’s your card number. Don’t worry they’ve got that covered too. It’s very easy because much of this relies on your spending patterns. I’ve never been to California. If I all of sudden start “buying stuff” in California that will throw up a flag, especially if it’s things I don’t normally buy like women’s shoes, makeup, and cat food.
Of course the fraud teams at your credit card company can’t catch everything. It’s smart to set up your own alerts. I have two and get emails for either alarm triggered. The first is if I spend more than a certain amount in a given transaction. It is a low amount of which I only purchase that much in one event a few times a year. The other is if I spend that same amount in a given day. That way if someone goes on a shopping spree I receive an email after that amount has been triggered. I’ve never been on a shopping spree so again I’d know if it wasn’t me immediately. Finally I check my credit card transaction on my iPhone every two days or so. It takes 30 seconds. You can do the same thing online.
Credit cards are a great tool in most cases. Some might worry about privacy concerns and prefer to carry cash. Every choice has its disadvantages, if your cash is stolen it is gone for good. You don’t get it back. I’m not worried about the privacy because I know the people seeing my transactions don’t care what I’m buying. I know this because I used to look at social security numbers and see credit reports for a living, and after 2 weeks of giggling I was numb to the whole thing.
*Merchants are also responsible for fraud and the card companies often issue “chargebacks” to the store where the transaction took place, eating into the store’s profits. This hurts the stores and it has been suggested that there be a Merchant’s Bill of Rights as well.
Photo: andresrueda
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
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