Credit Scams to Watch Out For

Reviewed by Julius MansaReviewed by Julius Mansa

At least once a month, you’ll see a story in the news involving various credit scams and their victims. If it happens to you, repairing the damage can be time-consuming and inconvenient. Credit scams disproportionately target people with low income, minority groups, and older adults. Learning about some of the more common scams and what you can do to avoid them is an important self-defense tool.

Key Takeaways

• Credit scams are very common and require consumer awareness to avoid becoming a victim.
• Fraud can involve losing money, but many scams are designed to steal consumers’ identities.
• Common sense is often the best defense—never respond to anyone representing themselves as an authority over the phone or online demanding payment—especially by gift card.
• If you suspect fraud or believe you are a victim of a scam, file a complaint with the Federal Trade Commission.
• Credit scams disproportionately target people with low income, minority groups, and older adults.

Credit Repair Scams

Advertisements in newspapers and on TV talk about credit repair services that promise, for a fee, to erase bad credit history or repair bad credit. The problem with the promises made by these credit-repair companies is that no one can legally remove negative credit information from a credit file. Most of the time, these companies collect thousands of dollars from people and simply vanish with the money. The only legitimate way to repair bad credit is by repaying any debt owed.

If you can’t afford to pay off all your debt, contact your creditors and ask about setting up a payment plan for your debt. Contact a credit counseling organization if you have problems setting up a payment plan with your creditors, and check your credit report regularly. You can get a free copy of your credit report each year from each credit bureau at annualcreditreport.com.

If there are errors on your credit reports, contact the consumer reporting companies (Experian, Transunion, and Equifax) directly. Alternatively, if you don’t have the time to reach out to the three credit agencies and are willing to pay a fee, any of the best credit repair companies can do so on your behalf.

Advance-Fee Loan

An advance-fee loan scam involves a lender making false promises to arrange low-interest loans. The lender often asks for upfront fees from applicants to arrange these bogus loans. Sometimes, the lender collects information from applicants and applies for a legitimate loan. Later, the lender tells the applicant that the loan was declined, and they disappear with the applicant’s money and identity.

It’s hard for people with poor credit to get low-interest loans from legitimate lending institutions. Because they are unsure about the chances of getting their money back, creditors are wary about issuing low-interest loans to applicants with poor credit. Generally, the only way to get a loan with poor credit is to get one with higher interest rates.

Credit Insurance Scams

Credit insurance is offered by loan and credit card companies. The insurance aims to protect debtors who cannot pay off their loans or lines of credit due to death, disability, unemployment, or health-related emergencies.

Some fraudulent companies offer credit insurance at a lower premium than legitimate institutions would typically offer. The problem is that these fraudulent organizations collect premiums and never fulfill their obligation when the client cannot repay a loan. To protect yourself, thoroughly research a company before purchasing any type of insurance.

Unauthorized Billings

Most companies let you set up automatic payments to pay bills or purchase subscriptions. While it’s convenient, automatic billing can be risky.

If you don’t pay close attention to your bank accounts, you might see unauthorized billings like increased charges or new fees. Try to sit down and look through your accounts to catch any unauthorized charges. The sooner you catch them, the easier it is to dispute the transactions.

Identity Theft

Identity theft occurs when someone illegally obtains sensitive information, like credit card numbers and Social Security numbers (SSN), and proceeds to take out loans, apply for credit cards, or make purchases. When the scam artist defaults on a loan, the real owner of the identity is contacted by creditors and held responsible for the loans. To avoid being a victim of identity theft, taking good care of personal information is essential. Some preventive measures include:

• Review your credit reports at least once a year. The three consumer reporting agencies are required by law to give you a free copy of your credit report annually. Just go to http://www.annualcreditreport.com/ to start the process.
• Shred all documents that contain information like account numbers and Social Security numbers. Buying a shredder does not cost much and can make it easy to safely dispose of personal information.
• Consider utilizing one of the best credit monitoring services to watch for suspicious activity on your credit reports. Several of these services also offer identity protection tools.
• If you are already a victim of identity theft, find instructions for filing disputes by going to the Federal Trade Commission website.

File Segregation

File segregation is a scheme that offers a new credit identity to someone with a bankruptcy on their credit record. Usually, the scammer offers the victim a new Social Security number or Employer Identification Number (typically used by businesses) and instructs the victim to fill out loan documents using the new numbers. The scammer does not tell the victim that obtaining a new credit identity is illegal and punishable by law. Scammers selling credit privacy numbers (CPNs) use a very similar strategy.

The scam artist lures victims by saying that having declared bankruptcy makes obtaining loans and credit cards impossible for up to 10 years. While bankruptcy will indeed remain on your credit report for 10 years, you continue to have the possibility of obtaining loans. Legitimate creditors have different criteria for choosing clients, but they might offer a loan at higher interest rates than normal to someone who has declared bankruptcy.

Phishing

Phishing is a fraudulent process of attempting to acquire sensitive information, such as usernames, passwords, and credit card details, by posing as a trustworthy organization in an email or by duplicating legitimate websites and luring unsuspecting victims into entering their sensitive information. Here are some protective measures you can take:

• Beware of websites that pop up from an email asking for sensitive information.
• Most banks and credit institutions have legitimate websites. If you must conduct business with them online, go directly to the website by typing it in, and don’t follow any links you are unsure of.

Phishing and spoofing scams often pop up around tax season and can involve fraudsters claiming to be from the IRS and demanding payment for unpaid taxes—often in the form of sending a gift card. The IRS has stated that they do not initiate contact with taxpayers by phone, email, or social media and only communicate through the U.S. Mail.

If you are already a victim of phishing or you suspect that a website you visited is fraudulent, contact the genuine company and freeze your accounts if you have to. Also, change the passwords to all your online accounts.

Work-At-Home Schemes

Some fraudulent websites offer the secret of success or a laundry list of legitimate work-at-home jobs. Sometimes, a company offers a position in the company and a “get rich quick” promise. Often, the company requests fees to be paid online with a credit card.

The company then steals the credit information and uses it for fraudulent purposes. If you need a list of work-at-home opportunities, some websites offer them free of charge. Remember that no legitimate company will charge a fee to hire you.

Online Dating Schemes

As weird as it sounds, fraudulent activities are also perpetrated by online dating sites. The FTC has estimated that consumers lost over $1.14 billion to romance scams in 2023. These sites usually ask for a fee for their services, and in addition to collecting fees, they steal information about the user of their services. Legitimate and fraudulent dating websites exist, so always thoroughly investigate before choosing one and paying for these online services.

Lottery Scams

This scam occurs when a consumer receives an email message notifying them of a lottery or contest they may not recall entering. The email often requires the consumer to pay a minimal fee using a credit card to access the winnings. The scam artist collects the payment and credit card number and disappears. No legitimate lottery operation will ask a winner for a fee or information such as a credit card or bank account number.

Frequently Asked Questions (FAQs)

What Are Some Common Financial Scams?

Phishing, online dating scams, identity theft, lottery scams, and unauthorized billings are just some of the scams you should be on the lookout for.

How Can I Protect Myself From Scams?

Don’t use a public computer or open network to send personal information or access financial accounts. Check your banking accounts and credit report regularly to catch unauthorized access. Be guarded when giving out personal details, especially if you get a phone call from a number you don’t recognize.

What Can a Scammer Do with My Credit Card?

A scammer can easily make purchases with your card, but they can also use it to open new accounts or lines of credit and sell your personal information to other criminals.

The Bottom Line

Recovering from the effects of a credit scam can take time. As the saying goes, an ounce of prevention is worth a pound of cure, so always protect yourself and any sensitive information. Remember that scams often target people with low incomes, minority groups, and older adults.

For more information about various credit scams, how to protect yourself from them, and what to do if you are a victim of a credit scam, visit the Federal Trade Commission website. You can also file a complaint with the FTC online or by phone.

Read the original article on Investopedia.