Beware the Perils of Prepaid Cards

For some, prepaid debit cards are a substitute for using a bank. For others, they're a means of controlling spending. And they can be a nice gift when you're not quite sure what to give someone.

Those are all reasons why prepaid cards are so commonly used. But the popularity of prepaid cards is obscuring their dangers. More than ever, prepaid cards are being used in scams to steal from consumers.

Being asked to pay through such services as MoneyGram and Western Union used to be one of the more obvious indicators of a scam. But the tide is now changing in the world of scams, tilting toward prepaid cards.

High-profile warnings

Warnings have been flying about the dangers of prepaid cards. The FBI, state attorneys general, the Better Business Bureau, National Consumers League, and the prepaid card companies themselves have been telling consumers of risks involving the cards and how they are becoming tools for those running scams.

The National Consumers League's Fraud.org site, which processes consumer complaints, has reported a surge in scams involving payments using prepaid cards. Scams asking for prepaid card information run the gamut, but can include items listed in online classifieds, demands for payment from scammers posing as being from utility companies or the government, and fees for supposed winnings (whether a lottery or trip).

Why crooks like prepaid cards

Why prepaid cards? Even more than the money transfer services, prepaid cards offer anonymity. Once a card is loaded, its value is with whomever possesses it. And if you transfer the value of your card to another card, there's virtually no way to trace the card number to a person. Since transfers from card to card can be done online without any identifying information, that means the thief who received the money could be on the other side of the world. And they have your cash, which usually means it's gone for good.

"Consumers should know that having a MoneyPak or other prepaid debit card is essentially the same as carrying cash," said John Breyault, director of the National Consumers League's Fraud.org campaign. "If you send the card to someone you don't know or give them the identification number off the back of the card, it's the same as handing them dollar bills. Our advice is that if someone asks for your MoneyPak number and they're not an approved partner of the company, it's probably a scam."

Using prepaid cards also has a different feel than using the wire transfer services since they look like and work like debit cards. You don't have to go to special counter and fill out forms as you do for MoneyGram and Western Union. Prepaid cards are increasingly part of the mainstream in America, and on their own raise fewer red flags.

Prepaid cards can be good for some consumers

Prepaid card experts like Curtis Arnold, founder of BestPrepaidDebitCards.com, note that not only are the cards increasingly being marketed to the un-banked and under-banked, but they're also becoming more popular as a budgeting tool, for those who want to limit spending to what's on a card rather than rack up credit card debt and damage their credit score .

But he and consumer advocates are also well aware of their dark side. Prepaid cards have been punished for years by consumer advocates over the fees that many charge for anything from checking the balance to drawing cash from an ATM to not using the card at all. While card issuers have toned that down, scam artists have ratcheted up their demand for payment via Green Dot MoneyPaks, Vanilla Reloads, and other similar cards.

"Prepaid debit cards offer many conveniences and are a smart option for many consumers, but create easy opportunities for scammers. Consumers should be aware of the dangers associated with prepaid cards," said Paula Fleming, vice president of the Better Business Bureau serving eastern Massachusetts, Maine, Rhode Island and Vermont. "They also lack the consumer protections that apply to bank account-linked debit cards."

There's a plus and a minus to that, Arnold explained. On the one hand, federal law limits consumer liability when fraud is committed using a credit card or debit card. On the other hand, Arnold notes, it can be a lot more disruptive to be defrauded when it involves a debit card that is tied to a consumer's primary checking account. So, even if your money is put back into your account you are likely to experience a period in which your normal spending could be derailed -- or you'll even end up bouncing checks. With a prepaid card, the amount lost is limited to what is loaded on the card.

And, he said, there is an attempt to try to give consumers greater peace of mind. MasterCard , for example, has said it will extend its fraud protection to prepaid cards.

Here are some tips to help avoid getting ripped off in a scam using prepaid cards:

  • Don't give a prepaid card number to anyone you don't know.
  • Don't reload the card of anyone you don't know.
  • Don't email your card number or receipt for loading it.
  • Don't provide card information for anyone who calls demanding immediate payment by prepaid card.

This article originally appeared on WisePiggy .

Top dividend stocks for the next decade

The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here .

Related links:

The article Beware the Perils of Prepaid Cards originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.