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Why you should stop wasting money on fraud prevention

By Guest Blogger(view all posts by Odysseas.Papadimitriou)
at 6:00AM Sunday February 17, 2013
under Personal Finance

We all waste money on things we could easily live without. That's no surprise, though, as a quick look at our runaway credit card debt reveals an obvious fascination with overspending. However, you might be surprised to learn what some of our most unnecessary money drains actually are.

Sure, you've got the usual suspects like luxury cars and oversized homes, but we also can't forget about things like rental car insurance and fraud monitoring services either.

While we may consider such things to be essential, they're actually redundant at best. For example, most credit cards automatically provide free auto rental coverage, and by choosing to pay for a policy through a rental company, you're actually negating what you've already got, not supplementing it.

The same goes for fraud protection. Each year, roughly 50 million people spend an estimated $3.5 billion on identity theft monitoring services, according to data from Consumer Reports. Considering that these services simply monitor your credit reports, remove your name from marketing lists, and search the Web for any mention of your financial information, that's a couple of billion too much.

Here's why:
  • You're entitled to free copies of each of your major credit reports every 12 months.
  • Fraud only impacts a fraction of one percent of all purchases made with credit cards and debit cards.
  • Consumers typically aren't liable for unauthorized transactions.
Free access to credit reports means you won't have to shell out for an expensive subscription service to determine if any illegitimate financial accounts have been opened in your name. The other two points mean that fraud poses less of a risk than you might initially think.

Card Hub's 2013 Consumer Fraud Liability Study supports this contention. It found that VISA, MasterCard, American Express, and Discover - the world's largest card networks - all offer $0 fraud liability guarantees for unauthorized credit card and signature debit card transactions. Discover cardholders are also covered for PIN debit transactions as well as at the ATM, and American Express has its customers' backs at the money machine too (Amex doesn't offer debit cards with PINs). Federal law fills in the rest of the gaps by limiting liability to $50 when you report fraud within two business days and $500 if you do so within 60 days.

In other words, while financial institutions and merchants are typically on the hook for fraudulent losses, you and I aren't. Therefore, rather than wasting money on fraud prevention services and pulling your hair out for fear of potential losses, you should instead take a chill pill as well as the following measures to minimize any remaining vulnerability.
  1. Use a credit card as much as possible: Regardless of what type of credit card you have, you won't be liable for unauthorized purchases. That's unfortunately not the case with debit cards.

  2. Always sign for debit card purchases: While debit card transactions "verified" by signature are more susceptible to fraud than their PIN equivalents, they're also more profitable for financial institutions. That's why fraud liability policies are more consumer-friendly when it comes to signature verification. If you always sign for debit card purchases, you'll also be under less suspicion should any unauthorized PIN transactions pop up.

  3. Exercise your right to free credit reports: Not only will this enable you to spot fraudulent accounts, but credit reporting agencies also tend to make mistakes, and you'll be able to sort them out too.

  4. Safeguard sensitive financial information: In other words, keep your PIN secret, shred financial documents before throwing them out, put a lock on your mailbox, and don't e-mail account info.
The aforementioned steps won't cost you a thing, while fraud monitoring will run you $100-300 per year. In other words, cutting the latter from your budget in favor of the former will score you resounding thanks from your wallet.

This article comes from our friends at Card Hub, a leading website that conducts personal finance industry research and helps consumers find the right credit cards for their needs.