Editorial Policy

Credit Card Security: Is Zero Liability Really Zero Liability?

default author image

By Eva Norlyk Smith, Ph.D.
May 22, 2009

With credit card fraud on the rise, millions of consumers every year experience firsthand the fear of seeing charges they never made appearing on their credit card. In most cases, victims have no idea how fraudsters managed to get a hold of their credit card information, nor when and how the next attack might strike.

Fortunately, there are many ways you are protected. Visa, MasterCard, Discover, and American Express all use several layers of security measures, including sophisticated fraud detection systems to monitor credit card accounts for unusual activity.

One of the greatest assurances that cardholders have, however, is Zero Liability on unauthorized charges. This means that if someone else uses your card in a store, on the telephone, or for on-line purchases, it’s the bank or retailer that will end up swallowing the cost, not you.

But is Zero Liability always zero liability? According to the fine print, under certain circumstances, cardholders may not be as protected as most might think. While you’ll likely be issued an immediate credit for fraudulent charges, this is a provisional credit and subject to final review. The actual coverage you’ll receive may be delayed, limited, or rescinded by your credit card issuer pending a review of the fraudulent charges.

Here is a list of what is required for Zero Liability coverage to be in effect for Visa and MasterCard credit cards. Please note that how these exclusions are applied will vary for each card issuer, so check with your credit card company to find out which terms govern your credit card.

The credit card account must be in good standing. If your credit card account is in default, you might be out of luck should a fraudster make off with your credit card information. Check with your credit card issuer to learn exactly what “good standing” means for your credit card.

ATM withdrawals and PIN transactions are not covered. Zero Liability coverage includes purchases made in a store, over the telephone, or online, but not ATM withdrawals (which involves knowledge of your PIN number). For example, let’s say your wallet is stolen and you have a note with your PIN number in your wallet along with your credit card. Should the thief put the two together and rack up ATM charges – sorry, you’re liable for the charges. Your only protection is that, due to the automatic fraud detection system that both Visa and MasterCard have in place, there’s a limit to the charges the fraudster can rack up before the account is automatically blocked.

In addition, in the case of Visa cards, PIN transactions not processed by VISA, are not covered.

You must report the fraud in a “timely manner.” What exactly a timely manner means varies from card issuer to card issuer, and not all give specifics. Bank of America, for example, stipulates that unauthorized card transactions must be reported within 60 days from the statement date to be covered. Check with your own credit card issuer for the terms that govern your card.

You must have exercised “reasonable care” in safeguarding your card. Any action that can be interpreted as “gross negligence” might disqualify you from Zero Liability coverage.

For example, let’s say you make your mom an additional authorized user on your credit card account and give her a card. If your deadbeat stepdad gets ahold of her credit card and racks up charges, you might have a problem. If you report the unauthorized charges right away, you could well be covered. However, if you ignore it, hoping he’ll simply pay the card off, and then report the unauthorized charges after several months when the charges have reached astronomical levels, you’re out of luck.

Third strike, you’re out. With MasterCard credit cards, if you have reported two or more other unauthorized events in the past 12 months, you’re not covered for a third event.

Lastly, the Zero Liability policy covers U.S. issued credit cards only, and some business credit cards are excluded.

The good news is that while there are exclusions to the Zero Liability policy, it’s easy to avoid falling under these by simply following basic precautions in safeguarding your credit card. Never let your credit card out of sight, keep your PIN number in a separate location, always check your statement carefully, and act immediately if any unauthorized transactions appear on your account. These are things that you should be doing anyway because when it comes to credit card fraud, you ultimately play the most important role in protecting the security of your account.