The No. 1 Way to Avoid Losing Money to Fraud

By Matthew Cochrane Markets Fool.com

Frank Abognale, Jr. is a conman turned FBI fraud investigator who was made famous by the 2002 blockbuster Catch Me if You Can, in which he was portrayed by Leonardo DiCaprio. In a remarkable tale of redemption, Abognale, after being apprehended decades ago, has not only assisted the FBI in fraud investigations, but also consulted with banks, financial institutions, and other businesses on how to reduce their risk of fraud.

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In a presentation given to Nevada State Bank clients in 2013, Abognale said he removed "99.9%" of fraud risk in his life by doing one simple thing: Using a credit card to make all of his purchases. Why is this one practice so important in preventing identity theft and lowering fraud risk? Abognale's reasoning was fairly straightforward and is the general consensus of the fraud-fighting community.

Image source: Pixabay.

Domestic credit card transactions are primarily regulated by the Fair Credit Billing Act, commonly referred to as the FCBA. Among its numerous provisions, the FCBA caps the extent to which credit card holders are liable for fraudulent transactions. Currently, card holders can't be held responsible for more than $50 worth of fraudulent charges. Better yet, virtually all major credit card issuers promise consumers they will not be held liable for any fraudulent charges -- not even the $50 they're free to take.

When fraudulent charges are made on a credit card account, the money lost belongs to the issuing bank. Cardholders are never without their own hard-earned money. The only dispute is whether the consumer owes the bank money. Personally, I would much rather dispute whether I owe someone money, rather than whether I will be able to get my money back after it is already gone from my account.

When comparing credit cards to other payment options like cash, checks, and debit cards, none of them come close to offering this same type of legal and financial protection. Besides dealing with a few minor inconveniences, like being without your credit card for a couple of days, one timely call to the credit card company can sweep away a host of fraudulent charges and leave the individual with little else to worry about.

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Besides the immense advantages of fraud protection, credit cards offer a number of other benefits that shouldn't be overlooked.

1. Reward points

There's an endless array of different credit cards that offer particular rewards that the holder can rack up simply by using the card for everyday expenses that were going to be made anyway. Some cards offer free travel upgrades, hotel stays, and airline points, while others offer cash back or gift cards to your favorite restaurants. If you find a card that rewards you for making routine purchases, then it can put a significant amount of money back in your wallet -- a benefit that no other payment method offers.

2. The chargeback

Did you pay for an item that was never delivered or was defective? If you take your case to the merchant but cannot get a refund, then your credit card company offers another recourse that stands a decent chance of success: the chargeback. The chargeback is basically where the credit card issuer helps the card holder plead their case to the merchant. If the card issuer finds the consumer's case meritorious, they can withdraw the funds from the merchant's account and return them to the consumer.

3. Credit score

Cash, checks, and debit cards will never raise your credit score, no matter how prudently you use them. Using credit cards and paying them off in a timely manner, however, will. Credit scores impact our financial lives far more than some people might think. Lenders use credit scores to determine the interest rates assigned to loans, whether for a home, a car, or a credit card. Paying lower interest rates directly translates to lower monthly payments, leaving more money for other priorities.

Image source: Getty Images.

Credit cards have their downsides. Their interest rates are especially high, which makes them dangerous if you don't pay your bill in full every month. But if you use them responsibly, they come with advantages that no other payment method can offer.

Worried about making a purchase on a website you've never visited before? Concerned about why your server disappeared with the bill -- and your credit card -- for such a long time?Apprehensive that the gas pump you used might have had a card skimmer?

If you used your credit card, there's little cause for alarm. According to federal law, you will never be liable for more than $50 of fraudulent charges. This level of protection is far greater than that of any other payment method. Best of all, everyone can enjoy this first-class protection while racking up reward points, building their credit scores, and enjoying unequaled purchase protection. All these benefits make credit cards the responsible consumer's clear payment method of choice.

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