Physical theft of cards:

When credit cards are stolen out of a purse or wallet, thieves have access to credit card numbers, expiration dates, and CVV2/CID numbers (the 3-digit un-embossed security code on the back of MasterCard, Visa and Discover cards and the 4-digit code on the front of American Express cards). Until the credit card is reported stolen, the thief can use it to run up charges.

Identity Theft:

Fraudsters can steal enough identifying information to apply for a credit card in someone else’s name (this is known as application fraud). Another type of identity theft fraud occurs when a thief changes the mailing address on a credit card account, reports the card lost and orders a replacement sent to their own address. This is known as account takeover.

Skimming:
Skimming is the theft of card information in an otherwise legitimate credit card transaction. Skimming is often committed by a dishonest employee of a legitimate business, and the merchant has no idea that illegal activity is taking place. Skimming can take place using low-tech methods, such as writing down credit card information (this occurs most commonly in restaurants or bars, since the cardholder is separated from his or her card when the bill is paid). On the other end of the spectrum, skimming can occur when high-tech devices swipe magnetic data off of a credit card. Thieves have even installed skimming devices over the card slots of ATM machines! To protect the security of their customers, all merchants should protect the security of their payment processing equipment and take steps to ensure that their employees are trustworthy.

Next: Fighting Fraud in the Store: Card-Present Transactions