Financial scams are increasingly common and can have devastating effects if you fall victim to them. From pyramid schemes to fake charities, con artists are finding new and manipulative ways to trick people out of their hard-earned money.
The best way to avoid getting scammed is to educate yourself on common tactics fraudsters use and learn how to recognize red flags. This article provides an overview of different types of financial scams and actionable tips you can take to keep your finances safe.
Common Types of Financial Scams
While scams may differ in specifics, most follow similar patterns in how they try to manipulate and deceive people. Below are some of the most prevalent financial scams to be aware of:
Pyramid Schemes
Pyramid schemes focus on recruiting new members rather than selling an actual product. Participants are made to believe they can make money by enrolling other people into the scheme, who in turn must recruit more members. [1]
The cycle continues, with money flowing from new recruits to members higher in the pyramid. Eventually, the scheme collapses when no new recruits can be found. Losses add up to billions per year from these schemes.
Advance Fee Scams
In an advance fee scam, victims are promised a financial reward or service after paying an upfront cost. Scammers make up excuses for the fee, such as processing charges, taxes, attorney fees, or transportation costs. [2]
But after paying, the victim either does not receive their promised item or the item turns out to be worthless or non-existent.
Fake Charities
While most charities are genuine, scammers sometimes exploit people’s goodwill by setting up sham charities to line their own pockets. They pull heartstrings with emotional causes that turn out to be completely fabricated.
These “charities” tend to ramp up activity during times of crisis or the holiday season to take advantage of people’s generosity. They collect donations but rarely spend funds on actual charitable services. [3]
Phishing
The goal behind a phishing scam is to steal sensitive information like credit card details, bank account credentials and social security numbers. Scammers pretend to be legitimate companies and send emails or call victims asking them to confirm private details.
These messages often convey a sense of urgency and threaten account suspension or legal action if questions are not answered. Links and phone numbers provided redirects to fake but convincing websites and automated messages. [4]
Debt Collection Scams
In this scam, perpetrators pretend to work for a collections agency claiming you owe money to a company – one you likely never signed up to receive services from. They will demand repayment and try instilling fear with threats of lawsuits or arrest if balances go unpaid. [5]
Some may even know a few bits of personal information to make the situation seem more real. The calls aim to frighten people into paying debts that simply do not exist.
Comparison of Financial Scams
| Type of Scam | How It Works | Red Flags | Impact |
|---|---|---|---|
| Pyramid Scheme | Recruits members to enroll ever more participants, with money flowing upwards. Eventually collapses. | Promises low risk and high returns. Emphasis on recruiting over product sales. Complex commission structure. | By the time most realize, they have lost hundreds or thousands of dollars. Collective losses in the billions per year. |
| Advance Fee Scam | Victims pay upfront costs for promised rewards or services that end up non-existent or worthless. | Requests suspicious upfront payment before receiving service. Vague language around final product or service offering. | Can result in loss of hundreds to tens of thousands of dollars per victim. Total losses difficult to quantify. |
| Fake Charities | Exploits donors’ generosity by collecting donations for sham causes that rarely get spent on actual services. | Vague mission statements and lack of details around activities. Name similarities with legitimate charities. Emotional appeals using crises or holidays. | Diverts funding away from legitimate philanthropic efforts and erodes public trust. Can collect millions in illegitimate donations. |
| Phishing | Steals sensitive personal and financial data through targeted emails, calls and fake websites that install malware. | Conveys false urgency, threats if questions unanswered or links not clicked, requests sensitive info. Emails have typos or awkward phrasing. | Enables identity theft and draining of bank accounts. Average loss around $500 but can be in the thousands per victim. Annual global losses in the billions of dollars. |
| Debt Collection Scam | Perpetrators pretend victims owe money to unknown companies and demand repayment with threats. | Threats escalate quickly if payment not made. Unable to provide documentation or details around alleged debt. | Hundreds of millions lost annually in the U.S. alone. While less per victim, attacks increasing in scale and frequency. |
Protecting Yourself from Financial Scams
While scammers may try all kinds of tricks to part you from your money, there are some simple precautions you can take to recognize and avoid these threats:
Be Skeptical of any Unsolicited Offers
An unprovoked phone call, email, text, or social media message requesting sensitive information or money should immediately raise suspicions, even if the message conveys urgency or threats. Verify legitimacy before responding.
Research Companies and Charities
Take some quick steps to vet any company or non-profit asking you for money. Search the company name plus words like “scam”, “fake” or “fraud.” Check complaint boards, rating bureaus, and domain age.
For charities look up tax status on IRS.gov and try to find details on how donations get used.
Check Contact Information
Call numbers, email addresses, and websites can be spoofed. Do your own lookup of the company phone number and domain information instead of contacting the details they provide.
For high-pressure sales requiring immediate payment, let skepticism prevail. Scammers often fear too much scrutiny from potential victims.
Never Pay Unexpected Debts
If someone claims you owe a debt, get documentation in writing first. Ask for proof like account statements, dates, transaction details and attempts made to collect prior to the call. Let them know you will only interact through mail going forward.
Monitor Accounts and Statements
Review financial statements frequently and notify institutions promptly about unauthorized charges or suspicious activity. Annualcreditreport.com offers your free credit report from each agency. Enroll in credit monitoring if identity theft is a concern.
Use Secure Passwords
Ensure passwords are long, complex and not reused across accounts. Enable two-factor authentication when available. Password managers help generate and remember login details on different sites.
Beware Free Trial Offers
Free trial language is often used to enroll unsuspecting customers in inexpensive subscriptions. Read the fine print associated with any free offer first. Use virtual card numbers from privacy.com or other providers when possible, which enables easy cancellation of recurring charges.
Frequently Asked Questions
What are some other common financial scams I should know about?
- Sweetheart scams prey on singles looking for romantic partners but really aim to con targets out of money.
- Refund and recovery scams promise unclaimed money from government or corporate funds that never materialize.
- Tax collection scams make false threats of penalties or legal action if alleged back taxes go unpaid.
- TV/radio scam ads use celebrity endorsements and miraculous claims to sell useless products.
- Technical support scams claim you have a virus and try to install malware disguised as antivirus software.
- Bank inspector scams have fraudsters posing as security personnel to inspect payment cards and steal account details.
- Loan fee scams charge upfront fees for loans that never actually fund.
How can I remove my information from scam call lists?
The Federal Trade Commission offers a National Do Not Call Registry where you can list phone numbers to reduce telemarketing calls. Some scam calls may persist, however, since fraudulent actors do not adhere to these registries.
For mail correspondence, opt out of pre-approved credit card offers and charity mailings using sites like optoutprescreen.com or DMAchoice.org. This cuts down on scam opportunities from mail as well. Unfortunately most scammers call numbers at random so calls may continue even after these steps.
What government agency handles financial fraud complaints?
In the United States, the Federal Trade Commission (FTC) takes complaints on financial fraud. Even if they cannot resolve individual cases, they log details in their Sentinel database for tracking purposes and to help identify larger network trends. Local police can also sometimes assist with individual scam cases.
The Consumer Financial Protection Bureau (CFPB) handles consumer complaints across products like mortgages, credit cards and student loans. Contact them about financial service providers engaging in suspected fraud or scams.
Can banks reverse fraudulent transactions?
Banks can sometimes reverse transactions if fraud is promptly reported. Rules around electronic transfers, money wires, checks and debit/credit charges vary, however. The quicker fraudulent transfers get flagged, the more likely banks can attempt recovery. Speak to your institution right away in any suspected fraud case to understand your rights around disputing charges.
Should I report scam attempts I encounter, even if no money was lost?
Absolutely. Reporting scams helps authorities track patterns so they can warn consumers, shutter scam operations, freeze assets and prosecute criminals. In the U.S. you can file complaints through the FTC Consumer Sentinel portal about phone, mail, email or online scams. Track details like caller ID numbers, mailing addresses, account details, URLs and email headers. Losses do not have to occur for your complaint to help in their enforcement efforts.
Final Thoughts
Scammers get more sophisticated each day in their schemes to illegally obtain money and sensitive personal information.Stay vigilant around offers that ask for upfront payments, prompt action under threat, or provide too good to be true opportunities.
Do your own separate research before handing over any amount of money or data at someone else’s request. Being informed on common financial scam techniques along with applying the tips provided above can help you avoid becoming the next victim.