Beware of scams using prepaid debit cards

Handle cards like cash in your wallet, say University of Wisconsin-Extension educators

Contact Peggy Olive, 608-647-6148, or J. Michael Collins, 608-262-0369,

A financial scam recently reported in Wisconsin targets college students who are told they have been approved for a student loan or grant. To collect the funding, the student is instructed to purchase a prepaid debit card to cover the cost of administration and handling fees. When the student provides access to the prepaid card, a scammer empties the account.

A more common scenario involves a phone call from someone claiming to be from a government agency, such as the IRS or law enforcement. This person might have personal information; for example, the last four digits of your Social Security number. The caller warns that you owe money and if you don’t pay, the consequences could include arrest or freezing of your assets. The caller tells you to pay your taxes or fine using a prepaid card. Once again, the account is cleaned out as soon as the victim provides the card information.

“As prepaid debit card use increases, so do the number of scams associated with them,” says J. Michael Collins, University of Wisconsin-Extension consumer financial specialist and director of the UW-Madison Center for Financial Security. “Prepaid card scams are targeted at a wide range of consumers, from college students to the elderly. They often combine new technology with age-old tricks to get individuals to send money or give out personal information.”

Stored value (or “prepaid”) cards are a small but growing replacement for cash and checks. So-called “open loop” cards can be redeemed at any retailer that accepts debit cards. These cards look like bank-linked cards and are issued with the Visa or MasterCard logo. Issuers can be banks or nonbanks. Prepaid debit cards offer the ability to pay for transactions and use an ATM, as well as make online or phone payments. Employers often use payroll cards as a replacement for direct deposit of paychecks for employees without bank accounts.

The reason prepaid cards in particular are so attractive to fraudsters is that funds are not insured against loss. Once money has been taken from a prepaid debit card, it is untraceable and can’t be put back. “The best bet is to handle your prepaid debit card information just like you would handle the cash in your wallet,” says Collins.

“Cards have a wide variation in fees for set up, re-loading and use,” according to Peggy Olive of Richland County UW-Extension. “Some consumers find the simplicity and fees attractive, especially if they have accumulated fees on checking accounts in the past, such as low balance fees. Cards may charge high fees, but relative to the alternative, may not be more costly. Some consumers prefer stored value cards as a way to control spending.”

The U.S. government will never phone an individual asking for money. “No government representative, and virtually no legitimate business, will ever ask you to pay them using a prepaid card or money transfer,” says Olive.

It is illegal for companies doing business by phone in the U.S. to promise you a loan or credit card and ask you to pay for it before they deliver. “Even if everything said on a phone call or email sounds legitimate to you, if someone asks you to buy a prepaid card, or if they request access to your bank account or credit card, that is a tip-off that they are probably committing fraud,” says Collins.

Anyone who feels they have been a victim of fraud is encouraged to contact local law enforcement. In addition, individuals can file a complaint with the Wisconsin Department of Consumer Protection Consumer Protection Hotline at 800-422-7128, and also with the Federal Trade Commission at 1-877-FTC-HELP.

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