Credit card fraud is a crime of deception. It occurs when someone pretends to be the cardholder and tricks a merchant (business, service provider, seller, etc.) into exchanging merchandise or rendering services while maintaining the belief that the credit card account will provide payment for services. Almost always the merchant eventually learns that they will not be paid, or the payment they received will be reclaimed by the card's issuing bank because they have been the victim of credit card fraud. This is why most merchants are becoming more vigilant then ever when it comes to verifying credit card numbers.
Credit card fraud is technically classified as a crime of identity theft. However there are several ways that credit card fraud could take place --
The Stolen Card - The most obvious way your identity is stolen is when your card is stolen. This makes it possible for the thief to make unauthorized charges on that card until you get a clue and cancel the charge or the credit card company notifies you to see why you are going over your limit.
Although technically businesses are supposed to check the identification of the cardholder this almost never happens in these modern days. This allows identity thieves to potentially charge up thousands of dollars in services and merchandises before you realize it. It is particularly easy to purchase things over the Internet and also at gas stations where there is nobody around to verify a card holder's identity.
Mail Order Fraud - One type of credit card fraud involves using a stolen credit card number or an identification card with a fake generated number to order merchandise and have it shipped to a temporary forwarding address. The thief then takes the merchandise ordered and sells it. When the person holding the card realizes that there is a fraudulent charge on their credit card report they call their credit card issuer and dispute it. This results in what is called a chargeback. The merchant then loses the money from the transaction, in addition to the merchandise that they do not recover. This is not only the most common type of credit card fraud it is also the most expensive.
Stealing Replacement Cards - In this scenario a thief intercepts a card that you have ordered to replace a lost card and uses it. This sometimes happens if you have been robbed of your card once. The thieves may know that you are expecting that second card and watching your mailbox. This is why so many banks now ask you to confirm your indent to the bank using your social security number, home address, mother's maiden names and personal questions. This type of theft has also inspired the credit card companies to make new cards non-active until you phone in to activate a newly received credit card.
First Party Fraud - Not all credit card theft is performed by thieves. Sometimes the thief is the cardholder. First party fraud or "chargeback fraud" commonly occurs when a legitimate cardholder pays for a good or service as usual but then claims never to have authorized the transaction, or that the good or service was never received. After disputing the charge the card holder only has to pay a $50.00 liability charge for an $800 he or she may have legitimately bought with her card.
Skimming - Skimming is the theft of credit card information by a corrupt employee who may use a magnetic device to scoop information from the magnetic stripe on your card or manually copy down your numbers to sell to thieves or use in their own identity theft ring. The magnetic skimmer devices can lift your three or four digit security code from the black stripe on the card. However keep in mind that most criminals don't need your PIN to make "card not present" type transactions over the Internet or over the telephone.
Criminals verify the numbers that are stolen by using a process called carding. This involves making a very minimal charge, one that is not that noticeable to you, on a credit card to see if it is still valid or if the PIN or password works. If it does then they will reserve a day when they will max it out and leave you or the merchant liable for the charges.
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