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How Does My Credit Card Company Know About Fraud Before I Do?

Credit Card Basics, Credit Cards
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The big joke whenever technology advances to the point where computers know things before you do is straight out of “The Terminator” movie series. You just say, “Skynet.”

While credit card companies are not yet on the verge of world domination and the destruction of the human race, we are fortunate that they have designed effective security measures to alert you to possible fraud on your account, well before you might even be aware of it.

Credit card companies have incentive to protect you, because they are also protecting themselves. They are the ones held liable for unauthorized charges beyond the first dollars. So it’s in their best interest to have the best fraud prevention technology they can afford. That’s why data analysis and risk management is big business, and it is also increasingly sophisticated.

Watching out for odd behavior

The first line of defense is an individual’s own behavior. As human beings, we tend to adhere to patterns. That includes our spending habits. Credit card charges will tend to cluster for each person based on geography, merchant type, size of charge, gender, total monthly charge, and countless other criteria.

As a longtime credit card holder, my patterns are pretty well established. So it wasn’t a surprise when I got an alert from my issuer’s early warning department when I made a purchase in Austin, Texas (where I’d never been), at an electronics store (to buy a digital tape recorder), and my hotel (a brand I’d never used) charged my room to my card. How were they to know I was at the SXSW festival?

» MORE: How to Dispute Fraudulent Credit Card Charges

Credit card companies detect fraud in its many forms

However, in pure Skynet fashion, the beauty of technology kicks in when actual fraud gets reported. Data are plotted and analyzed across multiple matrices. Frequent fraud at a given local merchant may suggest employee skimming is going on. Charges that cluster in certain areas may suggest a fraud ring. Another tip-off could be multiple charges from a merchant within a few moments of each other, suggesting the merchant tacked on a second charge the customer may not know about.

Yet another big tip in the age of the internet: multiple online charges in close temporal proximity. That suggests a thief got ahold of your card data and went on a spending spree.

Then there’s the infamous international charge — infamous not because fraudsters are more likely to make an international purchase, but because if you happen to be traveling internationally, your issuer may assume your card was stolen if you don’t travel abroad very often. You may find yourself with a dead credit card in the wilds of Switzerland. So it’s a good idea to let your issuer know if you’re planning a mountain-climbing expedition.

Next line of defense: EMV

The newest innovation is the EMV chip technology. EMV is short for “Europay, MasterCard and Visa.” It generates a unique transaction code each time you use the card, effectively giving the card a “thumbs-up” authentication code for the merchant.

Sherlock image via Shutterstock