What is Credit Card Fraud?

Legal Definition
Credit card fraud is a wide-ranging term for theft and fraud committed using or involving a payment card, such as a credit card or debit card, as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an adjunct to identity theft. According to the United States Federal Trade Commission, while the rate of identity theft had been holding steady during the mid 2000s, it increased by 21 percent in 2008. However, credit card fraud, that crime which most people associate with ID theft, decreased as a percentage of all ID theft complaints for the sixth year in a row.

Although incidence of credit card fraud is limited to about 0.1% of all card transactions, this has resulted in huge financial losses as the fraudulent transactions have been large value transactions. In 1999, out of 12 billion transactions made annually, approximately 10 million—or one out of every 1200 transactions—turned out to be fraudulent. Also, 0.04% (4 out of every 10,000) of all monthly active accounts were fraudulent. Even with tremendous volume and value increase in credit card transactions since then, these proportions have stayed the same or have decreased due to sophisticated fraud detection and prevention systems. Today's fraud detection systems are designed to prevent one twelfth of one percent of all transactions processed which still translates into billions of dollars in losses.

In the decade to 2008, general credit card losses have been 7 basis points or lower (i.e. losses of $0.07 or less per $100 of transactions). In 2007, fraud in the United Kingdom was estimated at £535 million.
-- Wikipedia
Legal Definition
Credit card fraud is a form of identity theft that involves an unauthorized taking of another’s credit card information for the purpose of charging purchases to the account or removing funds from it. Federal law limits cardholders’ liability to $50 in the event of credit card theft, but most banks will waive this amount if the cardholder signs an affidavit explaining the theft.

Credit card fraud schemes generally fall into one of two categories of fraud: application fraud and account takeover.

Application fraud refers to the unauthorized opening of credit card accounts in another person's name. This may occur if a perpetrator can obtain enough personal information about the victim to completely fill out the credit card application, or is able to create convincing counterfeit documents. Application fraud schemes are serious because a victim may learn about the fraud too late, if ever.

Account takeovers typically involve the criminal hijacking of an existing credit card account, a practice by which a perpetrator obtains enough personal information about a victim to change the account's billing address. The perpetrator then subsequently reports the card lost or stolen in order to obtain a new card and make fraudulent purchases with it.

Another common method used to achieve an account takeover is called “skimming.” Skimming schemes occur when businesses' employees illicitly access to customers’ credit card information. These employees then either sell the information to identity thieves or hijack the victim's identities themselves.

Technological advances have also created avenues for credit card fraud. With online purchasing now common, perpetrators need no physical card to make an unauthorized purchase. Additionally, electronic databases containing credit card data may be hacked or crash on their own, releasing customers' credit card information, putting the security of many accounts at risk at once.

See White-collar Crime; Computer and Internet Fraud.