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4 Types of Financial Scams and How to Avoid Them


Where there’s money, there’s the potential for fraud. The unfortunate truth of the matter is that, just as much as you want to make the most of your hard-earned money, scammers want to take it from you. The best way to avoid falling prey to a scam is knowing the red flags mean alerting you to steer clear.

Here are four types of common financial scams and some advice on how to avoid them.

Tax Scams

The average American will have little to no direct contact with the IRS, provided they’re paying taxes on time and in full. That’s why it can be so alarming to get a call, letter, email or text supposedly from the IRS. These startling messages often assert you owe taxes, and that you must pay immediately or face a stiff penalty. Or, you’ll receive a message from someone posing as the IRS looking to verify your personal information, like your social security number. They may even threaten imminent arrest or other consequences if you ignore their requests. These are scams.

While the IRS may contact you, they’ll always send a letter before reaching out in more “urgent” ways. You will also be able to verify an IRS employee is legitimate by asking for their full name, badge number, and contact information.

Debt Settlement Scams

If you’re facing more than $10,000 in debt, you may be considering debt settlement as an option for getting rid of it. Part of the appeal is that, when successful, debt settlement allows people to pay off debts for significantly less than the amount they originally owed. How? Consumers put money each month into a dedicated account until they have enough to kick off negotiations. One of the advantages of enrolling in a reputable program is that their trained negotiators will communicate with creditors for you, doing what they do best.

However, not every debt settlement program is legitimate. One major red flag is if someone asks for a fee up front to settle your debts—this has been illegal since 2010. As Andrew Housser, debt relief expert and co-founder of Freedom Debt Relief, notes, the Federal Trade Commission implemented an Advance Fee Ban back in 2010 which prevents companies from collecting a fee until after they’ve negotiated a debt for a client.

While this rule “cleaned out most of the knuckleheads from [the] industry,” some scammers still try to take advantage of people in debt with false promises. Do your research to find a legitimate organization with a track record of settling debts.

Phishing Scams

Phishing scams occur when someone contacts you posing as an institution like a bank, retailer or credit card company. As Investopedia outlines, scammers may say your account’s been compromised or requires an update. What they’re really trying to do is get you to give up your personal and financial information.

Avoid hyperlinks in emails unless you’re absolutely sure the email comes from a reputable source. It’s much better to call and check rather than provide any financial information over the internet.

Telemarketing Fraud

Of course, telemarketing fraud exists, too. People use the phone to offer all kinds of products and services. Scammers often pose as a business or charity to get you to hand over your money. Always take a step back to verify who’s calling. Consider it a red flag if someone pressures you into taking action as soon as possible. A good rule of thumb is to avoid giving out personal information if you’re less than 100 percent sure who you’re talking to.

Avoiding these four kinds of financial schemes is a matter of staying vigilant against posers. Only provide your personal and financial information over a secure connection, and never pay a

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