Beware of prepaid debit card scams
Prepaid debit cards may help you keep debt under control, but they also can make you an unwitting victim of fraud.
Criminals continue to find ways to utilize prepaid cards to scam people out of money, particularly as many of these cards are not linked to a bank account and the funds are not insured. The result: If you get scammed while using a prepaid product, you may not have legal protection or recourse to get your money back.
Before purchasing a prepaid debit card, be aware of the methods criminals are using to rob those who use these cards. Here are five of the most common scams targeting users of prepaid debit cards and tips for avoiding them.
Smile, you're on candid camera
Scam: Cellphone camera scam.
How it works: While you're using a prepaid debit card in a grocery store or at another checkout counter, the scammer stands behind you with a cellphone camera, and takes a 30-second video of you, says Jim Angleton, president of Aegis, a corporate prepaid debit card issuer. He then goes frame by frame to get your card information and PIN, and creates a "cloned card," Angleton says. Using your card number and PIN, the thief will use the cloned card to make purchases, draining the funds on your card.
How to avoid it: "Be aware of your surroundings," Angleton says. If the person behind you is crowding you, this is an indication they want close-ups of your card and PIN. Ask them to give you some room. When entering your PIN, use your other hand to shield the keyboard.
"If a person behind you has their cellphone camera pointed at you or at the sale terminal, do not enter your PIN," Angleton says. "Position your body to shield the entering of your PIN." If you think you may have been filmed, call your card company to report a suspicious activity, Angleton says.
"They will monitor your card for free," he says
Hello, Nigerian friends
Scam: Nigerian 419 scam.
How it works: Most Americans with an email account have received an email from a Nigerian fraudster, promising to share a large sum of money after the American wires a certain amount of money to cover expenses. Known as the "419 scam," this scam is named for the section of Nigerian legal code that deals with fraud.
Today, those fraudulent emails (which may originate in countries other than Nigeria) more frequently ask for prepaid debit cards rather than wire transfers. The scammer will request that the victim purchase a prepaid debit card and provide the scammer with the card number. With the card number in hand, the scammer can withdraw all the money from the card.
How to avoid it: If you receive an email from an unknown person promising to share large sums of money with you, it is most likely a scam. Remember, if something sounds too good to be true, it probably is. Delete the email, and never give out the card number of your prepaid debit card to an unknown person.
Hit with a flash attack
Scam: Flash attacks.
How it works: Fraudsters committing so-called flash attacks target prepaid debit cards and traditional debit cards because those cards do not entail the same level of fraud detection that credit cards do, says Robert Siciliano, CEO of IDTheftSecurity.com.
Fraudsters find ways to "skim" data that is embedded in a card's magnetic strip and create multiple cloned cards. These cards are distributed to numerous scammers, who all use them at different ATMs simultaneously or within a five- or 10-minute time period. "Apparently, fraud detection systems are unable to flag nearly simultaneous transactions from the same account," Siciliano says.
How do the scammers skim information off your card? In some cases, a salesperson or waiter will run your card through a card reader, which copies the information contained in the card's magnetic strip. Once the thief has obtained the card's data, he can then burn the card number onto a blank card or use the number to make purchases online or over the phone. In other instances, skimming occurs when a thief breaks into a closed store and replaces the point-of-sale terminal with a skimming device.
How to avoid it: "When using an ATM, gas pump or point-of-sale terminal, always cover your PIN," Siciliano says. If you use your debit card regularly, check your balance online or through customer service on a daily basis.
Tricky online loan applications
Scam: Deceptive marketing scam.
How it works: Some fraudulent payday loan companies have tricked online loan applicants into purchasing prepaid debit cards through their online applications, says Doug Johnson, vice president of risk management policy at the American Bankers Association in Washington, D.C. For instance, in late 2011, the Federal Trade Commission returned nearly $2 million to consumers who were tricked by Swish Marketing Inc. into buying prepaid debit cards when they filled out payday loan applications online. In that scheme, applicants unknowingly were charged up to $54.95 per application for unrelated prepaid debit cards with zero balances.
How to avoid it: Avoid applying for loans online, and always make sure you get an explanation of every fee you are charged.
Utility company impersonators
Scam: Utility fraud.
How it works: Another scam that takes advantage of consumers who are in immediate need of funds, this one targets utility customers who are behind on their bills.
"Callers claim to represent a person's utility company, telling them their service is scheduled to be shut off, then advise them to make a payment by purchasing a Green Dot Visa card," Johnson says. "They are then asked to call another phone number where information is obtained from the (prepaid debit) card, and the monetary value is removed from the Green Dot Visa card."
How to avoid it: "The best advice is to only purchase a prepaid debit card from a reputable, known business, such as your local bank, particularly in conjunction with your employer," Johnson says. "Banks are increasingly getting into the business, partly as a means to broaden their customer base and get the currently unbanked accustomed to banking services, as well as to assist their business customers who want to offer the cards to their employees to help them more efficiently deposit their pay."
Keep in mind that most utility companies will not proactively contact customers who are overdue on their bills, and they will never ask for card information over the phone.