Credit Card Fraud PreventionAll the Red Flags, Best Practices, & Tips You Need to Know to Stop Credit Card Fraud

October 11, 2022 | 12 min read

credit card fraud prevention

In a Nutshell

Credit card fraud prevention is more essential than ever. If we don’t take it seriously, total fraud losses will easily surpass $100 billion this year. This article examines the risk that credit card fraud presents to merchants, and provides some best practices to help prevent loss and defend against bad actors.

Get All the Critical Insights You Need for Credit Card Fraud Prevention

According to Shift Processing, there are nearly 3 billion credit cards in circulation globally as of July 2020. Here in the US, where we issue more than one-third of all the world’s credit cards, seven in ten people in the US have at least one credit card to their name.

The average American will use a credit card to pay for four out of every ten purchases. So, given the scale of the market, it’s no surprise that Shift finds roughly 40% of all credit card fraud occurs in the US as well.

Global annual credit card fraud losses will reach $49.32 billion by 2030. Keep in mind, though, that these are the direct fraud losses; there are ancillary costs associated with fraud that we need to consider as well.

False positives, higher overhead, chargeback fraud... all of these are interconnected as part of a larger problem of abuse in the market. If we don’t devote serious resources to credit card fraud prevention, total losses will easily surpass $100 billion this year. The volume of cardholder information floating around in the ether means that merchant credit card fraud prevention is more essential than ever.

Before diving into the deep end, though, let’s make sure we’re clear on what constitutes credit card fraud in the first place.

What is Credit Card Fraud?

Credit Card Fraud

[noun]/* kre • dət • kard • frôd/

Credit card fraud refers to the practice of taking another individual’s credit card information and using that information to charge purchases to the account or to remove funds from it.

There are two basic tactics typically used to commit credit card fraud. First, a fraudster might use stolen information to create a fake account in the victim’s name (identity theft). Or, the fraudster might use stolen credentials to take over a user’s existing account.

In the former case, a fraudster might try to impersonate an existing user. More sophisticated attacks compile stolen data to create new identities (instead of stealing and using an existing individual’s information). They can use these synthetic identities to make purchases, apply for credit cards, or conduct other activities in the fake person’s name.

Learn more about synthetic identity theft

In the latter case, a third party gains access to unique details of a trusted user’s online accounts. Fraudsters can pose as the real customer to change account details, make purchases, withdraw funds, and even leverage the stolen information to access other accounts.

Learn more about account takeover

Of course, the specific tactics that fraudsters employ to commit fraud can vary widely. As technology develops, fraudsters constantly explore new avenues through which to commit fraud.

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Common Credit Card Fraud Tactics

Card-not-present fraud is much harder to detect than traditional card-present fraud because neither the customer nor the customer’s credit card is physically present at the time of purchase. And, like we mentioned above, fraudsters have access to an ever-expanding variety of methods and tactics to steal.

Some of the most widely-used credit card fraud tactics include:

Business Email Compromise

Fraudsters impersonating people within a company to steal sensitive data, like business credit card information.

Learn more about business email scams

Clean Fraud

The fraudster uses stolen card data to illegally buy goods or services. At that point, however, the transaction information is manipulated to bypass fraud detection devices.

Learn more about clean fraud

Botnet Attacks

A fraudster submits waves of invalid transactions, making it impossible to conduct fraud management effectively.

Affiliate Fraud

Fraudsters enrolled as performance marketers use stolen card information to submit illegitimate transactions and claim unearned commissions.

Learn more about fraud as a service

These are a few of the most common tactics, but it’s not an exhaustive list. As mentioned above, fraudsters are resourceful and clever. They’re always looking for new opportunities to game the system and steal from cardholders and merchants.

How Credit Card Fraud Costs Impact Merchants

It’s obvious how credit card fraud impacts cardholders, at least initially. However, the costs of credit card fraud typically get passed along to merchants in the form of chargebacks.

A chargeback is a credit or debit card charge that is forcibly reversed by an issuing bank. This typically happens after a cardholder claims a transaction was the result of fraud or abuse.

The chargeback process is a crucial consumer protection mechanism. However, it also means that, for each instance of credit card fraud, a merchant loses a substantial amount of money. They have to cover:

  • The revenue from the original transaction
  • The cost of any merchandise shipped
  • The chargeback fees tacked on by their bank
  • Overhead costs like shipping, interchange, and marketing

These costs add up over time. Plus, if a merchant isn’t careful, their chargeback ratio may exceed limits imposed by the card networks, meaning they could lose the right to process card payments entirely.

Credit Card Fraud Warning Signs

The key point to remember here is that fraud isn’t a singular, self-contained threat. Instead, it’s a web of interrelated issues and threats that compound one another and contribute to a larger problem.

Fraudsters deliberately target different weak points with different tactics. For instance, bad actors may target a business for email compromise if their IT security isn’t up-to-date. If a merchant isn’t deploying the right tools and strategies to identify credit card fraud, they may try to run as many transactions as possible and get away with as much fraud as they can before the seller catches on.

The solution for fraud is just a click away.

The bottom line: unless merchants and cardholders prioritize credit card fraud prevention and other fraud and abuse detection, the problem will only get worse with time. So, what are the signs to watch for to identify potentially fraudulent transactions? The answers differ for cardholders and merchants:

Fraud Warning Signs for Cardholders

Cardholders should be wary of anything odd that suggests unauthorized activity occurring in their name. For example:

  • You didn’t receive a bill or statement when expected.
  • Unfamiliar charges show up on your credit card, checking, savings or other account.
  • You are denied a new line of credit, or given unfavorable terms when applying for credit.
  • You receive unsolicited credit cards or other documentation in the mail.
  • Creditors contact you trying to collect money for things you didn’t purchase.

Fraud Warning Signs for Merchants

Merchants should give extra oversight to any transaction that:

  • Is larger than normal for your business.
  • Comes from an unfamiliar customer.
  • Comes from a regular customer, but deviates significantly from their normal ordering.
  • Includes several of the same items.
  • Includes high-dollar value items.
  • Requests “rush” or “overnight” shipping.
  • Ships to an international address.
  • Ships to an address that you can’t verify with Address Verification Service (AVS).
  • Ships to the same address as another transaction, but uses a different payment card.
  • Uses multiple payment methods that have sequential account numbers.
  • Comes from the same IP address as another transaction using a different mailing address, physical address, or card number.

If any of the above applies it may be worthwhile to subject that transaction to manual review.

Top 3 Credit Card Fraud Prevention Best Practices for Merchants

It should be clear now that, while cardholders have some responsibility, it’s really merchants that are on the front lines of credit card fraud prevention. Therefore, it’s crucial that they deploy the right practices to prevent fraud and protect themselves against the resulting losses.

What should merchants do to ensure they’re protected? Here are the top three credit card fraud prevention best practices:

Keep Software Up to Date

Outdated fraud prevention solutions may fail to intercept new threats. They may even be exploited by fraudsters to their advantage. Keep up with all software updates and patches and deploy them as soon as possible.

Conduct Regular Audits

Merchants should conduct regular audits of all internal operations to ensure they’re doing what needs to be done. For instance, staying up to date with tech changes and ensuring employees abide by fraud prevention protocols.

Authenticate Buyers Based on Risk

Some buyers may need more in-depth screening or even manual review for a purchase. Merchants should segment lower-risk transactions from riskier ones. This way, they only have to introduce friction when it’s really necessary.

That's a solid starting point. However, it's going to take a lot more effort to ensure that you're doing everything you should to mitigate risk. To view a more extensive rundown of fraud prevention best practices, check out the article below:

Discover more fraud prevention best practices

Top 3 Credit Card Fraud Prevention Tools for Merchants

While abiding by best practices is crucial, it’s not going to be enough on its own. Merchants also need to deploy an array of credit card fraud prevention tools that work together and complement one another.

These three credit card fraud prevention tools should be included in every merchant’s arsenal:

3-D Secure

Implementing 3-D Secure 2.0 (or 3DS2) provides an added level of security by making sure the buyer is the authorized cardholder.

Learn more about 3DS

Address Verification Service

Address Verification Service (AVS) helps reduce risk by automatically checking the billing address listed in the transaction against the address registered with the issuing bank.

Learn more about AVS

Card Security Codes

The card security code is a common authentication tool that helps ensure the shopper has possession of a card. These codes cannot legally be stored by either the merchant or the processor.

Learn more about security codes

Again, this is not an exhaustive list. To view a more detailed and comprehensive list of recommended tools, check out the article below:

Learn more about fraud detection tools

Thinking Outside the Box About Credit Card Fraud Prevention

There are several other instruments and practices you can leverage to help fight credit card fraud. For instance, embracing mobile wallet apps like Apply Pay works to your advantage here. These apps not only provide more options to your buyers, but they typically rely on two-factor authentication and are often backed by biometric indicators like fingerprint scanning, which makes it hard to spoof.

Chargeback management is another valuable asset in your arsenal. Tools like Intelligent Source Detection can examine your past chargeback data, pinpointing specific sources that cause your disputes. You can then separate criminal fraud chargebacks from other sources like error or friendly fraud, enabling long-term chargeback reduction.

The important point to remember is that credit card fraud prevention isn’t a simple matter of using one or two basic tools. It’s an ongoing, evolving, and multilayer practice.’

Merchants need to stay a step ahead of fraud to be effective at protecting their businesses. They have to always anticipate where criminals might strike next. The good news: they don’t have to do it alone.


What is credit card fraud?

Credit card fraud refers to the practice of taking another individual’s credit card information and using that information to charge purchases to the account or to remove funds from it.

What are the common techniques for credit card fraud?

There are dozens of different tactics that fraudsters can deploy to commit fraud. Three of the most common today include affiliate fraud, fraud as a service (FaaS), and new account fraud.

What are the warning signs of credit card fraud?

Three of the most common signs of commit credit card fraud include orders that are larger than normal for your business, that come from an unfamiliar customer, or which come from a regular customer but which deviate significantly from their normal patterns.

How do merchants prevent credit card fraud?

The key to credit card fraud prevention is twofold. First, you must deploy best practices like keep software up to date and performing regular security audits. Second, you need to use the right fraud detection tools, including 3-D Secure, AVS, and card security codes (or CVVs).

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