What Is a Red Flag for Credit Cards?

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Financial institutions scrutinize credit card transactions for strange activity.
Financial institutions scrutinize credit card transactions for strange activity. (Image: Jupiterimages/Polka Dot/Getty Images)

Credit cards are vulnerable to fraud because criminals rack up illicit charges if they get your card or account number. Some even steal data electronically with devices called skimmers and make card copies. Federal agencies protect consumers with special "red flag" rules that make card issuers watch for patterns indicative of fraud and take action to protect legitimate cardholders whose accounts are compromised. The rules are part of the Fair and Accurate Credit Transactions Act.

Definition

Credit card red flags are types of account activity that commonly happen because of fraud. For example, suspicious transactions might include a sudden string of purchases in a state far from the cardholder's home, or even a foreign country or a rash of online or in-store purchases for expensive goods within a short time frame. Red flags also apply to credit applications, according to the Bureau of Consumer Protection, because identity thieves often open new accounts with their victims' information. Banks and other financial institutions can stop suspicious transactions or applications when they notice these red flags.

Covered Entities

Red flag rules for credit cards cover a wide range of financial entities. The rules apply to both national and state banks, federal and state savings and loan associations, federal and state credit unions and mutual savings banks. Other financial entities that provide transaction accounts to consumers are also subject to these requirements. Creditors such as loan companies, utility providers and mortgage brokers must also take steps to protect customers from fraud.

Covered Transactions

Credit cards are not the only account types subject to fraud monitoring under red flag rules. Loans for things like homes and cars, mobile phone accounts, checking and savings accounts and utility accounts are all protected, as are any other transactions that carry identity theft risk, according to the Bureau of Consumer Protection.

Fraud Indicators

Suspicious transactions with credit cards or other accounts are common red flags, but financial institutions and other covered businesses must watch out for other indicators. These typically include use of a new address rather than the residence listed on the account or consumer's credit reports and supplying odd documents to open new accounts. Consumers can also trigger red flags by adding fraud alerts to their credit reports through the Experian, Equifax and TransUnion credit bureaus.

Requirements

Financial institutions and businesses covered under the red flag rules must have active fraud prevention programs, according to the Federal Trade Commission. Their programs should be part of their regular business practices, and they must have plans on how to respond to suspected fraud or identity theft. For example, credit card companies can freeze accounts and call their customers to verify whether suspicious charges are legitimate.

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