Are prepaid debit cards a scam? What you need to know

How do prepaid debit cards work?

When you visit a convenience store or grocery store, you can find prepaid debit cards, backed by familiar credit card companies, in their aisles. Prepaid debit cards can be loaded with a store value if it is less than the daily limit. Daily limits can range from $500 a day to as much as $10,000, depending on the card. You bring the card to the cashier, designate your amount, purchase the card, and check out. In addition to providing money for the card
You can avoid the hassle of using a bank account or credit card. You simply pick up a card, choose a load amount, and check out.

In addition to providing funds to load the card, there may also be an activation fee. Most grocery stores charge $4.95 to activate the card. Prepaid cards can be used at most merchants and online stores. Once the purchases reach the stored value of the card, you can no longer make transactions, unless you reload the card. Cards can be reloaded where they were purchased.

Why do people commit fraud with prepaid cards?

Prepaid debit cards are easy to purchase, which makes them susceptible to illegal activity and financial scams. When you purchase a card, it isn’t easily tied to your identity. Cards may require you to provide some personal information, but they can still be exploited for illegal activity. Fraudsters can purchase prepaid cards with stolen or illegally obtained funds, transfer them into the card, and make purchases they would like. In other words, it’s an easy way for criminals to launder money. Prepaid debit cards have been used by drug traffickers, financial scammers, and other criminal activity.

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Prepaid debit cards scams to look out for

• Card reloading fraud: After getting ahold of a card they didn’t purchase, fraudsters call the company that loads the card. They con representatives into loading the card by claiming they are a payment processor. If the representative obliges, they can use the ATM to withdraw free money from the card provider.
• Debt collection scam: If you are a consumer, you should be cautious of debt collection scams. A scammer may pose as a utility company and threaten to shut off your power or service if you do not pay the “balance” due. They may request you to buy a prepaid debit card to pay off the balance. Avoid this debt collection scam by contacting your utility company directly or checking the balance due on your app. Other signs of a debt collection scam include threatening you with criminal charges, refusing to give a mailing address, requesting personal financial information, or refusing to provide other information about the debt.
• Swapped cards: A fraudster may purchase a prepaid debit card, clone it, and then replace a packaged card in a store with their previously purchased debit card. When a customer purchases and loads this repackaged card, the fraudster will use the funds loaded in the card on their cloned card. Watch out for this scam if you are purchasing a prepaid debit card! Check the packaging for any signs that it has been opened or tampered with.
• Skimmed cards: Financial scammers may scan, or “skim”, the magnetic stripe of a prepaid card in the store. Once it’s purchased and activated, the scammer will use the card information to conduct transactions.

Unfortunately, due to the lack of identity tied to the card, prepaid debit cards are hard to track for fraud prevention. Additionally, disputes and chargebacks are not typically covered with prepaid debit cards, except for certain providers. If you are purchasing a prepaid debit card due to poor credit, learn how to improve your credit score and get rid of your debt. To find better options to manage your money, learn more budgeting tips.