Some risks and uncertainties can be covered by purchasing insurance to help minimize the loss of your assets and income. However, financial schemes, scams, and fraud take away the income and wealth of millions of unsuspecting people each year — from all age groups and all income levels.
Avoiding consumer fraudAn intentional lie or misrepresentation to obtain benefit or advantage. Making a false or misleading statement. and protecting one’s identity are important aspects of keeping and growing your wealth. This section will discuss ways that will help you avoid schemes, minimize some risks of losing assets and protect personal information. It will focus not only on what a person owns but on protecting who a person is.
Avoiding Fraud and Common Schemes
You have an important responsibility to protect your own assetsAnything of value owned by a person or business (can also include money owed to a person or business). and income. People are sometimes provided offers or opportunities that are totally legal, but carry a high cost for the goods or services (e.g. rent-to-own companies). The best overall advice about financial schemes could be as simple as: if it sounds too good to be true, it probably is. The first step to protecting yourself is to learn to recognize the signs of fraud and common schemes.
Preventive measures that people can take to protect themselves from schemes and fraud begin with doing “homework” on offers, being skeptical about what sounds too good to be true, and making sure that identity trails are not left.
Legal — Yet Exorbitant
Across the United States there are companies such as payday loan services that are legal, but charge exorbitant interest rates and fees that can keep people in a downward spiral of debt. Often people find they are losing their income as they begin taking out another payday loan to pay off the last loan.
- Rent-to-own appliance and furniture stores are legal businesses, but their costs are structured so that unsuspecting consumers can pay two to four times what the same item would cost at an appliance or department store. When customers are late in making a payment by even a day, a fee and a reinstatement charge can occur. If the customer falls too far behind their payments, the item can even be picked up and returned to the business. However, after a certain number of months of renting and making payments, the item is owned by them. A flat screen television after 24 months of rental could cost double or triple the cost of the same TV had it been purchased elsewhere for cash or on credit at a low rate of interestAn amount of money paid for using funds over a period of time, generally an annual percentage rate. Bank interest is both an amount paid to depositors of funds and a finance charge for money that is borrowed. The price that someone pays for the temporary use of someone else’s funds. Interest is also a compensation that someone receives for temporarily giving up the ability to spend money. . The ads often offer instant approval and also delivery “today.” An individual might not have creditThe borrowing capacity of an individual or company. A transaction in which a borrower (or debtor) receives goods, services, or cash and agrees to repay the lender at a future date, usually with certain costs. to buy at another store and rent-to-own stores do not require any credit history.
- Check-cashing Stores
- People outside the banking system often use stores in the check-cashing industryAn industry founded in the 1930s that provides a link to the U.S. payments systems for consumers who elect not to deal with the banking system. to cash paychecks. These stores charge a percentage fee on the total amount of a check. For more information on the costs of check cashing see the Banking section in Managing Your Money.
- Credit Repair Companies
- These are companies that falsely promise consumers to erase a bad credit history (or even bankruptcy) from credit records. These companies charge a fee up front for credit repair servicesCompanies that offer to repair the credit of consumers. Consumers are advised to contact the Better Business Bureau for background information on companies offering credit repair services. In some states, these credit repair businesses are regulated. . Repairing one’s credit cannot be done in an easy and quick manner. A credit record is repaired as an individual pays off debts and/or liens in a timely manner, thus improving their credit ratingA formal evaluation of an individual’s or business’ credit history and capability of repaying obligations by a credit reporting agency. The credit rating is based on the number of outstanding debts and whether debts are being repaid in a timely manner. . For more information on how to do this yourself, see the Consumer Debt section.
- Payday Loans (not legal in all states)
- A person needing cash can obtain an advance on the next paycheck from a payday loan service. The borrower is usually asked to provide a paycheck stub and numbers of checking and savings accounts. The borrower provides a check postdated to the date of his or her next paycheck, and the lender cashes it on or after that date. These services can charge a very high interest rate (APR) — the APR can range from 390 to 780 percent (an average of 470%) for a two-week loan. Shorter-term loans have even higher APRs. Some people can get in the cycle of paying off one payday loan only to take out another and another.
- Some of the scams that consumers have been solicited for include: free holidays in the Caribbean to look at real estate, modeling schools promising fame and fortune to young people, unclaimed college scholarships, large prizes for buying magazine subscriptions, instant tax refund payouts, and various pyramid scams. With foreclosures on the rise there are many mortgage modification scams, promising to get homeowners out of foreclosure for a very high fee when these services are available for free through your local housing counselor or legal services agency. If you or someone you know has been a victim of a loan scam, you can report it at www.preventloanscams.org.
- Internet Traps
- The Internet age has brought with it a number of new ways to victimize consumers. In addition to online versions of traditional frauds involving sweepstakes winnings and bogus money transfers from foreign banks, the Internet now has its own unique frauds, such as phishingAn attempt to fraudulently acquire sensitive information via electronic communication, such as usernames, passwords, and credit card details, by masquerading as a trustworthy business. PayPal, eBay, and online banks are common targets. The term is a variant of “fishing” and refers to baits used in the hope of a “catch” of financial information. , which fools users into giving out confidential personal data about themselves online, and pharmingSimilar to phishing, but involves Trojan programs, worms, or other sophisticated virus technologies that attack the Internet browser address bar. When users type in a valid URL they are redirected to a fraudulent website. , which redirects the user to a bogus website for criminal purposes.