They say a sucker is born every minute, but shady businesses are good at convincing you you’re a genius, not a sucker, for giving them your money. Many of these outfits prey on people want to improve their finances, which adds insult to injury. You know to stay away from bogus IRS collectors and Nigerian princes, but there are some less obvious, perfectly legal scams people fall for all the time.
Payday loans sound like a good deal: you don’t get paid until Friday, but rent is due Wednesday, so take out a quick loan and pay it back on payday. In reality, it rarely works out this way.
Most borrowers default on their payday loan, take out another loan to pay off the original loan, and end up paying crazy, high interest rates—as high as 780 percent for a two-week loan. In the U.S., borrowers pay $7 billion annually in payday loan fees.
Payday loans are a notorious debt trap that send consumers into a downward spiral of financial ruin, yet people still fall for them, not because they’re suckers, but because they don’t see any other options.
Before you sign your life away on a payday loan, first check out the alternatives. Ask your employer for an advance. Ask if your company offers any hardship programs. Call your other lenders, like credit card companies and see if they can put you on a hardship repayment program with a lower minimum monthly payment. Almost anything is better than a payday loan.
Credit unions are a solid alternative, too. Many of them offer loans through The National Credit Union Foundation’s REAL Solutions® program, an initiative that helps borrowers who don’t have a lot of money. Some credit unions also offer “signature loans,” which are aimed at people with bad credit. The terms are much better than payday loans and designed to help you improve your finances, not completely destroy them. The National Consumer Law Center lists some specific credit union loans in their Payday Loan report (PDF). Services like Kiva and Lending Circles offer loans peer-to-peer lending. Again, you still have to pay back the loan but the terms are a hell of a lot better than payday loans and designed to help you get back on your feet.
Paying for Your Credit Report
When I was 20, I wanted to get my finances in order like an adult. I had to pull my credit report, but I wasn’t sure where to start. Then I remembered a commercial I’d seen for “freecreditreport.com.” You know, the one with the cheesy band telling you to sign up and get your finances in shape? I should’ve known better, but it seemed harmless enough—why would a pop band lie to me about money management?
I signed up, got my credit report, and everything was fine until a few months later, when I noticed a random charge for $19.95 on my credit card statement. I didn’t recognize the name, so I called my credit card issuer and they asked if I signed up at freecreditreport.com. Yep, they charged me $1 for my credit report, but I also unwittingly signed up for a monitoring service (buried in the fine print) that cost $19.95 every month. Of course, I opted out, but I also wondered how many other naive, young people fell for it. This happened a long time ago, but people still get duped. In fact, a recent thread on Reddit Personal Finance brought it up again.
As that Redditor pointed out, you never have to pay to check your credit report or score. There are plenty of ways to get both for free, but annualcreditreport.com is the official source, backed by the Consumer Financial Protection Bureau. You get a free copy of your report every year from each of the three major credit bureaus. You shouldn’t have to fork over your credit card to get a copy, either.
People turn to debt consolidation because they want to be responsible. They want to get their debt in order and pay it all back, but they have no idea where to start, so they turn to the “professionals” for help.
Unfortunately, though, more often than not, debt consolidation isn’t a good option. You take out a loan and, rather than make multiple payments to all your lenders, you make one single payment to the debt consolidation lender. It sounds reasonable enough, but there are so many caveats with it that people usually end up in a worse situation.
For one, debt consolidation stretches out the term of your debt. With interest, you usually pay more over time than you would just paying back your lenders on your own. Plus, if you miss a payment, you’re typically hit with costly fees, penalties, and higher interest rates. There are legitimate debt consolidation companies, but the whole process is already kind of shady, which makes it a breeding ground for scammers. LendingTree lists a few red flags:
- You’re told that your loan approval is “guaranteed” or “highly likely”
- You’re asked for an upfront payment before the loan is approved
- You’re told that this will be a “quick fix” when it will take time to repay your debt
- You’re asked to provide access to your bank account so the company can make automatic withdrawals
- The contract says you can only sue the company in certain states – and not the state where you live
- The company only has a P.O. Box and not an office address
Back in the day, someone invited my parents to a seminar that was supposed to help them earn huge amounts of money from real estate.
Both my parents were immediately skeptical and told me, “if all it took to get rich was going to a free seminar, everyone would be rich.”
You’ve probably heard of these, too. If it’s not real estate, it’s some other get-rich-quick pyramid or Ponzi scheme. You go to the free meeting (maybe you even get a free T-shirt!) and then you’re pressured to spend more money, buy someone else’s product to sell, or enroll in some really expensive courses.
These have been going on for ages, but people still fall for them. The problem is, a lot of these gurus lure people in with legitimate, sound personal finance advice. Robert Kiyosaki is a recent example. His book, Rich Dad, Poor Dad, was (and still is) considered a solid, inspiring personal finance read. The problem is, the book probably isn’t real. It’s more “a myth, like Harry Potter,” as Kiyosaki himself put it.
But, okay, the lessons are still good, right? Sure, but Kiyosaki (or his brand, however you want to look at it), leveraged these lessons to build his own get rich quick real estate seminars. Marketplace, a Canadian consumer show, investigated the seminars and describe what they found:
“It’s a three-day sales pitch, basically,” Deol said. “You’re not going to learn anything. But I think most people were a little afraid to say anything. It was very intimidating. The organizers would come up to you and stand behind you, over you and there was no talking allowed.”
The other problem is that there are some legitimate seminars, courses, and financial coaches out there who really do help people improve their finances, negotiate higher salaries, or build their businesses. So how do you separate the legit experts from the frauds? Here are some red flags, according to ScamWatch:
- An advertisement or seminar makes claims such as ‘risk-free investment’, ‘be a millionaire in three years’, or ‘get-rich-quick’.
- You are invited to attend a free seminar, but there are high fees to attend any further sessions. The scammer, posing as the promoter, may offer you a loan to cover both the cost of your attendance at the additional seminars and investments.
- You see an advertisement promising a quick and easy way to ‘unlock’ your superannuation [retirement account] early.
Also, legit courses usually teach you general skills you can apply to any kind of business you want, whereas the scams aim to get you on board with something more specific: a company, product, timeshare, or business model.
Of course, if you have any doubts whatsoever, you should look up the company or individual’s standing with the Better Business Bureau. They include seminars, and they’ll tell you how many people have complained about them and what kind of complaints have been lodged.
Fake Financial Advisors
If you need help managing your money, you might turn to a financial planner, advisor, tax preparer, or accountant. There are a lot of different types of financial service professionals, and not all of them are legit. The scammers ride the coattails of the accredited ones.
This is called a “Misrepresentation Scam.” Basically, frauds misrepresent their credentials to make you think they’re trustworthy when all they want to do is take your money, Bernie Madoff-style. Investopedia puts it like this:
…there are dozens of financial planning designations such as certified financial planner (CFP), registered investment advisor (RIA), certified public accountant (CPA), chartered financial analyst (CFA) and many more. The public may not be aware of the designations, ethics, or requirements for a certification and thus may be receiving advice from someone with no education, experience, or background in the investment advising field. It’s quite easy for someone to hang up a shingle and start doling out advice. The scammer can then close up shop and walk away with the proceeds or swindle the unsuspecting clients with fake products.
When you hire a financial professional, make sure they have the credentials that matter. For example, if you need someone to manage your money, you want a fee-only Certified Financial Planner®, registered with the CFP Board. Real CFPs take a fiduciary oath to act in their customer’s best interest; otherwise, they could lose their license. This means they can’t sell you a bunch of sketchy investments just to earn a commission. Just because a financial advisor or investment professional isn’t a CFP doesn’t automatically make them a scam artist, but CFPs are very particular about their titles because it’s a sign of trust.
When it comes to your taxes, make sure your tax pro is a Certified Public Accountant, preferably registered in the IRS Tax Preparer Directory. If you’re hiring someone to invest for you, they should, at the very least, be a certified Chartered Financial Analyst or Registered Investment Advisor. You can also use the National Association of Personal Financial Advisors database to find highly-rated, legitimate professionals.
Credentials are just a start, though, and they don’t necessarily make a good money manager. You still want to ask the right questions and do your research.
If you want to get your finances in order and you don’t know where to turn, there are too many sketchy businesses out there that will take advantage. They’ll find a way to trick you into believing you’re making a good decision, but if you know what to look out for, you know when to stay away.
Illustration by: Sam Woolley