Buzz
It's said that a fool is born every minute, but cunning businesses excel at making you feel like a genius instead of a sucker when they convince you to hand over your money. Many of these schemes target people seeking financial improvement, which only adds to the betrayal. While you know to avoid phony IRS agents and emails from Nigerian royalty, there are other less obvious, but completely legal, scams that continue to trap people on a regular basis.
Payday Loans
Payday loans might seem like an easy fix: you're short on cash until payday, but rent is due now, so you take out a loan to cover it. In reality, it rarely turns out as planned.
Most payday loan borrowers default on their loans, end up taking out new loans to cover the old ones, and face sky-high interest rates—sometimes as high as 780 percent for just two weeks. In the U.S., people collectively pay $7 billion each year in payday loan fees.
Payday loans are a well-known financial trap that can spiral borrowers into an endless cycle of debt, yet many still fall for them—not because they’re naive, but because they feel there are no better alternatives.
Before committing to a payday loan, explore other options. You could ask your employer for an advance, inquire about hardship programs at your workplace, or reach out to other creditors, such as credit card companies, to see if they can offer you a hardship repayment plan with a lower monthly payment. Any alternative is better than falling into the payday loan trap.
Credit unions provide a strong alternative. Many participate in The National Credit Union Foundation’s REAL Solutions® program, which supports borrowers with limited financial resources. Some credit unions also offer “signature loans” for people with poor credit. These loans have better terms than payday loans and are intended to help rebuild your finances, rather than ruin them. The National Consumer Law Center highlights several specific credit union loans in their Payday Loan report (PDF). Additionally, services like Kiva and Lending Circles facilitate peer-to-peer lending. While you still need to repay the loan, the terms are far more favorable than payday loans, and they’re designed to help you recover.
Paying for Your Credit Report
When I was 20, I decided it was time to get my finances under control like an adult. I needed to pull my credit report, but wasn’t sure where to begin. Then I remembered a commercial for “freecreditreport.com.” You know, the one with the cheesy band telling you to sign up and get your finances in order? I should’ve known better, but it seemed harmless—after all, why would a pop band mislead me about money management?
I signed up, got my credit report, and everything seemed fine until a few months later when I noticed a charge for $19.95 on my credit card. I didn’t recognize the name, so I called my credit card company. They asked if I had signed up at freecreditreport.com. Sure enough, they charged me $1 for my credit report, but I had unknowingly enrolled in a monitoring service (hidden in the fine print) that cost $19.95 a month. Naturally, I canceled, but I couldn’t help wondering how many other unsuspecting people—especially young ones—had fallen for it. This happened a long time ago, yet people are still getting duped. A recent thread on Reddit Personal Finance even brought it up again.
As that Redditor pointed out, there’s never any need to pay for your credit report or score. There are plenty of ways to get both for free, but annualcreditreport.com is the official, government-backed source, endorsed by the Consumer Financial Protection Bureau. You’re entitled to a free copy of your report once a year from each of the three major credit bureaus. And you certainly shouldn’t have to give your credit card details to get it.
Debt Consolidation
People seek debt consolidation because they want to take control of their finances. They want to pay off their debts and get everything sorted, but they often don’t know where to begin, so they turn to “professionals” for help.
Unfortunately, debt consolidation often isn’t the solution it seems to be. You take out a loan and instead of juggling payments to multiple lenders, you make a single payment to the consolidation lender. While that might sound reasonable, there are so many drawbacks that people often end up worse off.
For one, debt consolidation extends the duration of your debt. With interest, you’ll often pay more over time than if you were simply repaying your lenders directly. Additionally, missing a payment typically results in steep fees, penalties, and higher interest rates. While some debt consolidation companies are legitimate, the entire process tends to be a bit sketchy, making it a fertile ground for scammers. LendingTree highlights several red flags:
You’re promised that loan approval is “guaranteed” or “extremely likely”
You’re asked to pay upfront before any loan is approved
You’re told that it’s a “quick fix” when, in reality, it will take time to pay off your debt
You’re asked for access to your bank account for automatic withdrawals
The contract states that you can only sue in specific states—not the one you live in
The company provides only a P.O. Box, not a physical office address
While consolidating debt might seem like a good idea, in most cases, you’ll be better off with your own debt repayment plan or, if you’re feeling desperate, credit counseling.
Wealth-Building Seminars
Years ago, someone invited my parents to a seminar that promised to teach them how to make massive profits through real estate.
“If getting rich was as simple as attending a free seminar, then everyone would be rich.”
Both of my parents immediately became skeptical and said, “If getting rich was as simple as attending a free seminar, everyone would be rich.”
You’ve probably come across these too. Whether it’s real estate or some other get-rich-quick scheme, you attend a free meeting (maybe even score a free T-shirt!), only to be pressured into spending more money, buying someone else’s products to sell, or signing up for costly courses.
These scams have been around for a long time, but people still fall for them. The issue is, many of these so-called gurus bait people with legitimate personal finance advice. Robert Kiyosaki is a recent example. His book, Rich Dad, Poor Dad, was (and still is) considered an influential, solid read in personal finance. However, the book may not be entirely genuine. As Kiyosaki himself put it, it’s more “a myth, like Harry Potter.”
But, okay, the lessons might still hold value, right? Sure, but Kiyosaki (or his brand, however you interpret it) used these lessons to promote his own get-rich-quick real estate seminars. Marketplace, a Canadian consumer show, investigated these seminars and shared their findings:
“It’s essentially a three-day sales pitch,” Deol remarked. “You won’t actually learn anything. But I think most attendees were too intimidated to speak up. It was a very aggressive environment. The organizers would stand right behind you, hovering over you, and there was no room for conversation.”
The real issue is that there are legitimate seminars, courses, and financial coaches who genuinely help people improve their finances, negotiate better salaries, or grow their businesses. So how do you tell apart the real experts from the scammers? Here are some warning signs, according to ScamWatch:
An advertisement or seminar makes promises like ‘risk-free investment,’ ‘become a millionaire in three years,’ or ‘get-rich-quick.’
You’re invited to a free seminar, but future sessions come with hefty fees. The scammer, disguised as the event promoter, may even offer you a loan to cover the costs of attending these additional sessions and investing in their programs.
An ad promises a quick and easy method to ‘unlock’ your superannuation [retirement account] early.
Legitimate courses typically focus on general skills that you can apply across various businesses, whereas scams tend to lure you in with something much more specific: a company, a product, a timeshare, or a particular business model.
If you’re feeling unsure, take the time to research the company or individual’s reputation with the Better Business Bureau. They track seminars, and they’ll show you how many complaints have been filed against them and what kind of complaints those were.
Fake Financial Advisors
When you need help managing your finances, you might turn to a financial planner, advisor, tax preparer, or accountant. There’s a wide range of financial professionals out there, and not all of them are legitimate. Scammers often latch onto the credibility of the accredited ones to deceive you.
This is a “Misrepresentation Scam,” where fraudsters pretend to be qualified to deceive you into trusting them, just like Bernie Madoff did. Investopedia describes it this way:
...there are many financial planning certifications like certified financial planner (CFP), registered investment advisor (RIA), certified public accountant (CPA), chartered financial analyst (CFA), among others. The public might not fully understand the certifications, ethics, or criteria for earning these titles, leaving them vulnerable to advice from individuals with little or no background in investment advising. It’s easy for someone to put up a sign and start offering advice. The scammer can then shut down their operation and disappear with the money, or trick clients into buying fake products.
When hiring a financial professional, ensure they hold the credentials that truly matter. For example, if you need someone to manage your finances, seek a fee-only Certified Financial Planner® registered with the CFP Board. True CFPs are legally bound by a fiduciary duty to act in their client’s best interest, or they risk losing their license. This means they cannot sell you questionable investments just to make a commission. Not every financial advisor or investment professional without a CFP is a scam, but CFPs are meticulous about their title because it signifies trustworthiness.
When it comes to taxes, ensure your tax professional is a Certified Public Accountant, ideally listed in the IRS Tax Preparer Directory. If you’re hiring someone to manage investments, they should at least hold a Chartered Financial Analyst or Registered Investment Advisor certification. You can also turn to the National Association of Personal Financial Advisors database to find well-rated, reliable professionals.
Credentials are just the starting point, and they don't guarantee someone is a skilled money manager. You still need to ask the right questions and do your homework.
If you're looking to take control of your finances but feel uncertain where to begin, beware of the countless dubious businesses ready to exploit you. They’ll find ways to convince you that you're making the right call, but by knowing the warning signs, you'll be able to avoid falling for their tricks.
Illustration by: Sam Woolley
