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Is Zero Liability Ever a Bad Thing?

Credit card use puts consumers at risk for identity theft and fraudulent charges. There are all types of unscrupulous individuals who make careers of stealing others' personal information and using it to make purchases from jewelry to automobiles. When an individual's account is breached, thieves can rack up thousands of dollars in charges, leaving the card holder broke and with bad credit. This is why some credit card issuers provide what is known as "zero liability." Zero liability is a policy that limits the amount of fraudulent charges for which a cardholder would be responsible. Offering zero liability is a good marketing tool because customers who are hesitant to use credit cards may find security in having some level of protection.
Any liability protection requires that a consumer act promptly when he or she discovers that fraudulent charges have been made against an account. Federal law limits a credit card holder's liability to $50. However, fraud must be reported within two days to take advantage of this option. If fraudulent charges are reported after two days but within 60 days, the consumer's liability becomes $500. When fraud is reported after 60 days, customers typically are responsible for all charges. 
Zero liability is attractive to consumers, because it exceeds the federal requirement. Card issuers that have zero liability policies indicate that if a cardholder experiences fraudulent charges, he or she does not have to pay even the $50 minimum. Cards issued by Visa and MasterCard all have this option. Discover and American Express also offer some protection against fraudulent charges. 
Zero liability is not just limited to consumers. Businesses are also protected by zero liability policies depending on the card(s) that they hold. This is a helpful option for businesses, because fraudulent charges could max out a company's credit limit. The zero liability provision allows a business to have a line of credit needed to operate while the fraud allegations are being investigated. 
The problem with zero liability policies is that the way credit card issuers apply them is not always consistent. By the time an individual or business learns that there have been fraudulent charges made to an account, it may be too late to take advantage of protections like zero liability. This is because of the window of time for reporting the fraud. Information provided to consumers, otherwise known as the "fine print" is usually very confusing. Add to that the hassle of contacting a credit card issuer by telephone and having to navigate through a series of recorded messages and prompts, and it is easy to see why some fraud victims become frustrated. As a result, some victims of fraudulent charges give up rather than have the charges removed from their accounts. 
In some cases, consumers may not be sure if the fraudulent charges may be removed as some card issuers look at fraud on a case-by-case basis. For example, if a family member decides to take another family member's card and rack up excessive debt, a card issuer might look at that situation as negligence on the part of the fraud victim and might conclude that the cardholder should have been more careful with his or her cards. 
There are other concerns with zero liability. Some credit card issuers only honor zero liability policies for cards issued in the United States. Another problem consumers might face is that an account that is not in good standing may not qualify for zero liability. The key for consumers is to become very familiar with card issuers' policies and spend some time reading the fine print. The question is whether the zero liability policy is inherently bad? 
Zero liability seems like a good business practice, especially if card issuers value their relationships with consumers. When a consumer is faced with a huge bill for fraudulent charges and is unable to pay, his or her credit rating could suffer. When policies work in the favor of fraud victims, it can be a huge in helping them avoid financial ruin. However, there are situations where zero liability might be abused. For example, a card holder decides to go on a shopping spree or enjoy a night on the town and realizes that paying the money back is impossible. The individual might report the items as purchased fraudulently and avoid paying for them. This is when zero liability does not work as intended.
Consumers should be proactive and take their own steps toward protecting their credit cards and credit information. First, a consumer should get a copy of the free credit report. All this takes is going to the Federal Trade Commission (FTC) website and clicking on the annual credit report link. From this link, it is possible to look at each of the three credit reports.
Another protective measure is to review credit card statements when they arrive in the mail. Tossing mail to the side or throwing it away puts individuals at identity theft, which is the starting point for most credit card fraud. By reviewing credit card statements, consumers can determine if there are fraudulent charges and work with the card issuer to resolve the issue early. Due to the rules concerning zero liability, it cannot be emphasized enough that any threat of fraudulent charges should be reported to the card issue immediately after they discovered on the statement.
Consumers should ask questions about zero liability before agreeing to accept a credit card. This will help them use cards wisely and understand the rules for reporting fraudulent charges.
Zero liability is a good policy when it is applied in a judicious way that protects a consumer's credit. Problems arise when card issuers fail to honor their own policies by making it difficult for victims of fraud to remove bogus charges. On the other hand, consumers who see zero liability as an opportunity to get cash advances or purchase items without having to pay for them create headaches for honest people--and after all, the concept of zero liability is all about helping honest people maintain the integrity of their credit.

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Alice Bryant's picture

Alice Bryant is the Editor of Creditnet and a personal finance expert with over a decade of experience writing about credit cards, credit scores, debt repair, and more.

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