Who's responsible for kids' unauthorized card charges?
If you think your child would never use your credit card without your knowledge, you may be in for a rude awakening. In fact, thousands of parents have learned the hard way that for kids and teens, charging a purchase is as easy as pressing a button.
When your own kids do the unauthorized purchasing, who pays? The law's answer is clear: You're not liable for unauthorized purchases. But when you layer on credit card companies' liability policies, their understandable interest in getting paid, plus parental bonds of love, things get murky. What does "authorized" really mean? And if your little one charges $100 for "big bowls of treats" in the Tap Pet Hotel game, do you really have to report your kid to the cops before you can have their charges erased from your credit card bill?
Those questions gained higher visibility January 2014 when the Federal Trade Commission ordered Apple to pay out a minimum of $32.5 million to reimburse parents for unauthorized mobile app purchases made by their kids. "Whether you're doing business in the mobile arena or the mall down the street, fundamental consumer protections apply," said FTC Chairwoman Edith Ramirez in a statement. "You cannot charge consumers for purchases they did not authorize."
The crux of the charges against Apple in a class action lawsuit is that they failed to notify users that entering an iTunes password allowed 15 minutes of access, leaving kids free to make pricey in-game purchases without entering the password again. One girl racked up $2,600 in charges playing the app Tap Pet Hotel; other kids spent $500 in the apps Dragon Story and Tiny Zoo Friends. In at least some cases, kids didn't even realize they were spending real cash, not the imaginary currency of a digital world -- and parents insisted that they shouldn't be held responsible for purchases they didn't make and didn't know about. The settlement also requires Apple to change its billing practices to require a higher level of parental consent.
What you're responsible for
Of course, some kids are making purchases with their parents' credit card that aren't inadvertent. Finding hard and fast numbers about how often family identity theft occurs proves difficult, "since this type of theft is often under-reported," says Becky Frost, senior manager of consumer education with Experian's ProtectMyID. But according to the FTC, more than 45,000 consumer complaints about credit card fraud were filed in 2012, and it's estimated that in 16 percent of those cases, the victims knew the thief personally.
No matter how it occurs, learning that your child is behind a surprise charge on your credit card bill is jarring.
The good news: Federal law protects you from liability for unauthorized purchases. According to the Truth in Lending Act, you're only responsible for $50 of an unauthorized purchase made with your credit card.
Even better, most card companies have zero-liability policies that add protections beyond federal law -- meaning they'll let you off the hook for the entire amount. MasterCard clarifies that its zero-liability policy applies to all unauthorized transactions, whether made in a store, by telephone, or online, as long as your account is in good standing and you "exercised reasonable care in safeguarding your card from loss or theft." Visa's policy is similar, stating that "Visa will always protect you from unauthorized use," as long as you report fraudulent purchases to your credit card company.
Defining unauthorized use
The challenge is that it's not entirely clear what constitutes "unauthorized use." Federal law defines it as "the use of a credit card by a person, other than the cardholder, who does not have actual, implied, or apparent authority for such use, and from which the cardholder receives no benefit."
However, some card companies, including Bank of America and Capital One, specify that fraud protection applies only when credit cards are lost or stolen.
Once you report an unauthorized charge, your credit card company launches its own investigation and may ask you to provide the police report number of your complaint with local law enforcement officials. Sure, your kid used your credit card without your permission. But did he really steal it?
Some parents feel like they have to say yes in order to get fraud protection. In the United Kingdom, 48-year-old Doug Crossan filed an official police complaint against his 13-year-old son, Cameron, after the boy made $6,000 in charges on different digital games, including Plants Vs. Zombies. "I am sure Cameron had no intention to do it, but I had to have a crime reference number if there was any chance of getting any credit card payments refunded," Crossan told a British newspaper.
Billy Pinilis, a New Jersey-based consumer fraud lawyer, says that in the United States, the law doesn't distinguish between a kid buying virtual coins in an app or pilfering your credit card from your wallet to go on a shopping spree -- or for that matter, a thief taking your wallet from your car. An unauthorized purchase is an unauthorized purchase. That, says Pinilis, could have rendered the Apple-FTC settlement moot. "You could make the argument that [the FTC] didn't do anything for consumers. Consumers weren't liable for these charges anyway. What the FTC did was benefit the credit card issuers."
When you report an unauthorized purchase, he adds, "It's not an accountholder's obligation to fill out any criminal reports or do anything of the sort. All they have to do is make it clear that they didn't authorize the charge."
But a credit card company that disputes its cardholder's version of things may refuse to reimburse the money. In that situation, Pinilis recommends seeking the counsel of a lawyer who specializes in credit card fraud (you can find one through the National Association of Consumer Advocates). If your card company doesn't believe that your kid's charges were unauthorized, "it's incumbent upon the credit card company to demonstrate that in court."
It's not an accountholder's obligation to fill out any criminal reports or do anything of the sort. All they have to do is make it clear that they didn't authorize the charge.
|-- Billy Pinilis
Consumer fraud lawyer
Bottom line, says Pinilis: "If you find yourself in the unenviable position of being the victim of identity theft, understand that you're not responsible for the charges and understand that credit card companies are interested in getting paid, not in educating you on what your rights are. You shouldn't necessarily take as true what they're telling you."
Keeping kids from your cards: 4 tips
While legally you shouldn't have to pony up for your kids' unauthorized purchases, morally is another matter. Financial literacy expert Neale Godfrey, the chairman of Green Street Commons, which produces apps that teach kids about money, believes that the FTC-Apple settlement shouldn't have relieved parental responsibility. "If you want to raise your own children to be financially responsible, you need to take that responsibility and accept it."
By all accounts, preventing family identity theft, or even inadvertent purchases, is simpler than crossing your fingers that your card company's zero-liability policy kicks in fast. Here's how to do it:
- Protect your credit card information. Invest in a safe or locked file cabinet to store all your credit card statements and any other documents or receipts that could include passwords or account numbers. If you're worried you can't trust your teen, be careful where you put your wallet at home. "An identity thief needs nothing more than a credit card account number and expiration date to rack up huge charges on your credit cards," points out Frost.
- Lock down digital devices. Password-protect your financial information online, including in online shopping sites, and make sure you log out when you leave your computer. Use your device's settings to apply parental controls so that kids can't make an in-app purchase without your password, then make sure your kids can't guess or stumble on your password. A family rule that children have to use computers and devices in public areas of the house allows you to monitor what they're doing online.
- Give your kids a real allowance. To help kids understand the concept of money, let them earn an allowance by performing chores, but forgo digital banking. "You give it to them in real money," recommends Godfrey. "You take them to a real bank. And when you're in a real store they're using real money. After they understand the concept of real, then you can go electronic. If you start out with electronic, they don't get that buying things online is real money."
- Clarify your expectations. Have a conversation with your children about your household money rules, including what kids can and can't purchase, what you'll pay for and what they're responsible for. Make it clear that your children aren't allowed to use your credit card or buy something online without permission, and set clear consequences for what happens if they do -- including that they'll have to pay for what they bought. Doing so not only prevents problems, it protects you. "If you do that and they do use [your credit card], then you clearly have not authorized the charge and you're not responsible for the charge," says Pinilis.
See related: 5 key federal laws that protect credit card holders
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