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Finance glossary

What is credit card fraud detection? Definition and examples

Shanna Hall
5 Min

Definition: what is credit card fraud detection? 

Credit card fraud detection is a term that is used to describe the different ways credit card providers and users prevent, identify, and manage credit card fraud. Fraud detection systems are usually digital and utilize automatic checks, like the source location of purchases. 

In recent years, artificial intelligence has been implemented into credit card fraud prevention, tracking your spending habits and behaviors to pull out unusual transactions. Both providers and credit card users have an obligation to monitor transactions to detect fraud. 

Definition: what is consumer credit insurance (CCI)?

Consumer credit insurance, known as CCI, adds another layer of protection to users of credit cards. This is a supplemental insurance policy that protects you against monetary losses arising from fraudulent purchases and identity fraud. 

Credit card companies do not require CCI when taking out a card and you should evaluate if the expense makes sense for your situation. For example, if you’ve already been a victim of identity fraud, CCI might provide you with peace of mind and extra assurance. 

Processes: how does credit card pre-authorization work? 

Credit card pre-authorization is a temporary hold placed on your credit card by merchants. This is done to ensure you have sufficient credit for the transaction. Have you ever noticed a $1 pending charge when you fill your car up with gas? This is a pre-authorization charge. 

Pre-authorization charges will not clear your account but will instead serve as a pending transaction until the full amount clears. Fraud detection systems look to catch unusual and suspicious pre-authorization charges before the transaction is posted to your account. 

Application: understanding how to use a digital wallet

A digital wallet is a type of virtual payment that is linked to your credit card. Instead of swiping your physical card, you can use your digital wallet and “tap” the payment. Not all credit card providers will offer this feature. 

There are benefits to digital wallets outside of convenience. For one, digital wallets can help you with credit card fraud prevention. Most wallets have encryption and authentication requirements that make it difficult for hackers to break. 

Additionally, digital wallets can help you safeguard against losing a physical card. It can be easy for a card to fall out of your purse or wallet, but it’s much more difficult to lose your phone. Not to mention that many phones have tracking features and locks if they do get lost. 

Moreover, scammers have the ability to access your credit card numbers through certain devices attached to payment modules. If you swipe your card, you might be putting yourself at a greater risk for fraudulent credit card transactions. 

Strategy: keeping an eye on transactions

Preventing identity theft and fraudulent purchases relies on closely monitoring transactions. There are many ways to keep an eye on transactions, but first, you must know the difference between posted and pending items. 

Pending items are transactions that have been initiated but are waiting on the fund transfer. You will find pre-authorizations in your pending transactions. Posted transactions are those that have completed the fund transfer. 

For example, let’s say that you go out to eat at a restaurant. Your bill comes to $25, and you leave a $5 tip. Usually, the server will swipe your card before you leave the tip, resulting in a pending transaction of $25. After the fact, the server will enter the tip. Then, the payment processor will adjust your pending transaction from $25 to $30 and post the transaction. 

Proper fraud prevention requires you to consistently review your pending and posted transactions for any signs of credit card fraud. However, if you made a purchase from a merchant or restaurant and your pending transaction isn’t reflecting the correct amount, wait until the transaction posts. The merchant might make an adjustment. 

Insights: how is credit card fraud detected?

Credit card fraud is detected with the help of artificial intelligence and consistent monitoring. Credit card networks and providers use artificial intelligence to monitor transactions and compare them to historical data. 

For example, if your credit card details are used to make a purchase in Alabama but you reside in Michigan, your provider might flag the transaction. Additionally, you should go through each credit card statement and set up alerts when your card is used.

Security: credit card fraud detection security features

Credit card fraud detection systems are designed to alert you promptly if there are any suspicious charges. For cardholders, this might come in the form of push notifications and texts from your provider. 

Remember, if you get a text to confirm a charge, go into your app to verify. Don’t click on any suspicious links or re-enter your card number. For merchants, they are alerted of fraud by the user and through their artificial intelligence systems. 

Action: what to do if you think your card has been compromised 

Digital apps make it easy to lock, block, or freeze your card at a moment’s notice. If you notice anything unusual, freeze your card right away through the app or by calling a representative. You want to block any other charges. This is also true if you lose your credit card. 

If you notice a posted transaction that you don’t recognize, you will need to dispute the credit card transaction. If you believe the charge is fraud, alert your credit card provider right away. However, if the transaction is from a credible merchant but for the wrong amount, you can submit a dispute through the app or by calling a representative. 

Protection: how to keep your credit card safe from scammers

The fraud rate has been increasing over the past few years, making credit card fraud prevention extremely important. Know where your credit card is at all times and promptly alert your provider of any suspicious or unusual activity. Keeping your credit card safe relies on taking swift action. 

In summary

  • Credit card fraud occurs when an unauthorized third party gains access to your credit card numbers. 
  • Credit card fraud detection and prevention is conducted with the help of artificial intelligence. 
  • Make it a priority to consistently review your credit card statements and transactions for fraudulent purchases. 

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