Simon Kingston, a 33-year- old headhunter, found out this month that cash machine fraudsters had stolen more than £3,000 from his bank account in less than a week.

When Kingston, who works near Piccadilly in London, checked his account online, he saw suspicious transactions, including one in which someone on the other side of the capital had taken money out. “I saw that 30 seconds before I logged on, someone in Hounslow had been enriched to the tune of £300. They would have taken more if I hadn’t checked my balance.”

The biggest worry for Kingston was that the thefts would take his account over the overdraft limit, stopping the standing order which pays his home loan. “Then I would have defaulted on my mortgage, which would mean a black mark on my credit rating.”

Kingston is not alone. Cash machine fraud has surged 34 per cent from a total £29.1m in 2002 to £39m last year, according to the Association of Payment Clearing Services (Apacs), an industry trade body.

Indeed, banks have warned customers recently of potential dangers. First Direct last month wrote to about 110,000 current account holders who often use cash machines, also known as ATMs. In the letter, the bank said fraud was rising and customers who withdrew cash very often increase their vulnerability to the thefts. While the bank says customers can choose how often to take cash, it adds: “The more you use the machines, the greater the risk.”

Royal Bank of Scotland introduced a warning on cash machines in April advising customers not to use ATMs if they saw anything suspicious.

The Financial Ombudsman Service, which handles complaints against companies, reports a steady increase in cases about alleged cash machine fraud.

While fraud can be stressful, honest, sensible customers should not lose money. The industry’s voluntary Banking Code requires banks and building societies to compensate customers, unless they can show that the account holders acted fraudulently or without reasonable care.

The code says that, if someone uses your card before you tell the bank it has been lost or stolen, or clones your card details, the most you will have to pay is £50. Seymour Fortescue, the chief executive of the board which aims to ensure banks comply with the Banking Code, says: “If someone has acted in good faith, very few banks would require you to pay the £50.”

However, a handful of institutions do not sign up to the code. The best known is C. Hoare, a private bank. Alexander Hoare, its chief executive, says the bank was reluctant to come under the code’s authority because it conducted surveys of customers which showed they were content with the service they received. That said, Hoare believes the bank adheres to the spirit of the code. If customers suffer cash machine fraud without being fraudulent or foolish, the bank compensates them.

However, the frauds cost banks big sums. One barrister who has prosecuted in several cases of cash machine fraud says banks were paying £10,000-£12,000 a day in premiums to insure against such losses. “The banks are paying out huge amounts,” she says. Apacs believes that banks and building societies could offer better deals to customers if they were not losing money because of fraud.

The thieves work in a variety of ways. In one of the most sophisticated techniques, they attach so-called “deep throat” devices, often combined with cameras, to cash machines. These record your PIN as you tap it into the machine, as well as your account number and sort code. The details are then transmitted wirelessly to criminals waiting nearby, who either withdraw money from ATMs or use the account details to buy goods and services.

Criminals frequently withdraw money just before and shortly after midnight, so that they can take out the maximum allowed over two days as quickly as possible. But others are more daring. “They’re brazen; this happens in the middle of the day,” says the barrister, who says many thefts take place in shopping areas such as Liverpool Street station in London.

To avoid falling victim, customers should not use cash machines more often than necessary and be vigilant when they do need to take money out. Apacs advises people not to use cash machines if they are suspicious, or if anyone makes them feel uncomfortable. If someone watches you as you type in your PIN, press “cancel” and walk away. Shield the keypad to make sure no one can see the number you tap in.

Banks also remind customers that they can take out cash when they buy things in many shops, and should consider paying for purchases with debit cards, to reduce their need for cash.

As for the effect of missed payments to lenders, borrowers are unlikely to suffer cuts to their creditworthiness, says Equifax, the credit rating agency. They should get in touch with their mortgage lenders and explain why any home loan payments arrived late.

Apacs says banks have done numerous things to fight fraud. They put cash machines in well-lit places, install CCTV cameras to deter crime and liaise with the police and companies which supply cash machines.

Above all, banks are introducing “Chip and Pin,” a campaign to replace the UK’s credit, debit and store cards. Each new card will carry a chip to prevent criminals from skimming or copying details onto counterfeit cards. It says two out of five people in the UK have the new cards and 90 per cent will have them by the end of this year.

In the meantime, Kingston has concerns: “It seems that ATMs are being rendered moribund by cloning technology.”