Unauthorized Use of Credit Cards
If you find that there has been an unauthorized use of your credit card, the manner in which it will be handled is governed by the Truth in Lending Act. (15 U.S.C. § 1643.) That Act is a federal law that applies to open-ended credit, i.e., credit cards, whose purpose is to protect consumers from inaccurate and unfair credit billing and credit card practices. The provisions of the Truth in Lending Act that govern unauthorized use apply to both consumer and business credit. (15 U.S.C. § 1603.)
The Act provides that you are not liable for the unauthorized use of your credit card unless:
1. The card is an accepted credit card (e.g., AMEX, VISA, MasterCard) and the card issuer has provided a method whereby you can be identified as the person authorized to use the card;
2. The card issuer gives you adequate notice of your potential liability and provides you with a description of the means by which you can notify it of a loss or theft of your card;
3. The unauthorized use occurs before the issuer has been notified that an unauthorized use of the credit card has occurred or may occur; and
4. The liability in not in excess of $50;
(15 U.S.C. § 1643).
Thus, if you and the credit card issuer have complied with the above requirements, your maximum liability for an unauthorized charge is $50.00.
Because the maximum liability for an unauthorized use is relatively low, the card issuer may attempt to prove that the use was authorized, which would permit it to collect the full amount of the charge. For these purposes, an “unauthorized use” is defined as the use of a credit card by someone other than the cardholder who does not have actual, implied or apparent authority to use the card and from which the cardholder receives no benefit.
“Actual authority” exists when you, the cardholder, expressly permit (i.e., authorize) another person to use your credit card.
“Implied authority” exists when you, the cardholder, speak or act in a manner that leads another person to believe that he or she is permitted (i.e., has authority) to use your credit card.
“Apparent authority” exists when you, the cardholder, lead a third party (e.g., the credit card issuer) to believe that another person is permitted (i.e., authorized) to use your credit card. In DBI Architects v. AMEX, 388 F.3d 886, a court considered the question of whether apparent authority to use a credit card existed in a business setting. The court found that it did because the cardholder, who was the business owner, had paid the charges (that it later claimed were fraudulent) for almost a year after it had received the monthly billing statements that identified both the charges and the user, who was one of its employees. The court found that by paying the allegedly fraudulent charges without objection for over a year, the cardholder, i.e., the business owner, had misled the credit card issuer into believing that its employee (i.e., the wrongdoer) was authorized to use the corporate card. Thus, the court concluded that a cardholder does have certain obligations to prevent the fraudulent use of his or her card. One of those obligations is to avoid leading the credit card issuer to believe that charges are, in fact, authorized when they are not. The court found that, in this instance, the cardholder (i.e., business owner) had taken no steps to avoid fraud by, for example, separating the approval and payment functions within its cash disbursement process. Because of the failure to take such steps and the acts that led the card issuer to believe that the uses were authorized (i.e., payment of the charges without objection), the cardholder was found to be liable for the charges that it claimed were unauthorized.
What all of this means is that as a credit card holder, you can take steps to limit your liability for the unauthorized use of your credit card. First, you should notify your credit card issuer as soon as you become aware of a potential or actual unauthorized use of your credit card. However, even before that, you should make sure that you are not saying or doing anything that would lead another person to believe that he or she is authorized to use your credit card and/or that would lead a third party (such as the credit card issuer) to believe that charges made by another person are authorized when, in reality, they are not. Taking these steps may protect you from being held liable for a charge that you claim is unauthorized.
Kathy Delaney Winger (www.kathydelaneywinger.com) is a banking and business attorney who represents banks, credit unions, financial services companies and businesses in commercial and corporate transactions.
The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.