skip to main content

See the results of our 2022 Personal Finance Study!

10 Common Scams: How They Work and How to Avoid Them

Alex Huntsberger
Alex Huntsberger is a personal finance writer who covered online lending, credit scores, and employment for OppU. His work has been cited by, Business Insider, and The Motley Fool.
Read time: 10 min
Updated on April 8, 2022
From advance fee schemes to reverse mortgage scams and telemarketing fraud—keep yourself safe from these common cons!

People have been scamming each other for thousands and thousands of years. No matter how hard we try to stop them, con artists and scammers are always going to be dreaming up new schemes to get at your hard-earned money.

Still, there are many common schemes these fraudsters run that should be easy for you to identify—so long as you know what to look for. After consulting the FBI's helpful list of common fraud schemes, we picked out the 10 scams that are most likely to affect you.

We'll let you know how they work, how you can identify them, and, most importantly, what you can do to keep yourself (and your money) safe.

1. Advance fee scam

If someone comes to you with a financial or business proposition that requires you paying them up front, they are probably running an “advance fee” scam. These con artists come around with a wonderful opportunity for you to “triple your money” or “get in on the ground floor.”

They ask to be paid upfront for their services—they might refer to it as their “finder's fee.” Then once they have been paid, the money or business opportunity they were talking about never materializes. Meanwhile, they fade into the background.

To protect yourself against this scam, remember to always do your research into someone before paying them for services not yet rendered. Watch out for P.O. boxes and non-disclosure agreements, anything that might suggest this person’s business is really a fly-by-night operation that runs on secrecy. And lastly: If what they’re promising sounds too good to be true, it probably is!

2. Identity theft

These scams have become increasingly common as more and more of our lives (and our sensitive personal information) move online. It used to be a person had to go through your trash to steal your identity. Nowadays, they’re just as likely to get it by sending you a “phishing” email that gives them access to your laptop.

When someone steals your identity, they can use your personal information to take out loans and credit cards, to make purchases online, maybe even to commit crimes. The only thing worse than having a bunch of debts in your name that you’re suddenly responsible for is having the police show up and arrest you for a crime you didn’t commit!

To protect yourself from identity theft, make sure you always shred your sensitive mail and documents, don’t give out your credit card number over the phone unless you made the call, regularly check your bank and credit card statements, and order a (free) copy of your credit report to review at least once a year.

3. Internet auction fraud

There are two common types of fraud that occur with internet auctions. The first kind is when a person grossly misrepresents the item that they are selling. They promise they are selling you a priceless copy of Action Comics #1 but then they deliver you a hand-drawn zine called Achtung Cantrips # Slevin. The other type of fraud is where you pay them for the merchandise that they never deliver. At least the other gal got that stupid zine from her fraudster; you’ve got bupkus!

This is another scam where doing your research pre-transaction is one of your best buffs against disaster. You should also be extra wary of sellers outside the U.S., and never give them your social security number or other personal information.

Lastly, this one of the few times where we’ll encourage you to do a transaction on your credit card instead of your debit card. If the seller never delivers or delivers something other than they promised, a credit card will let you dispute the charge, whereas a debit card will not.

4. The “Nigerian Prince” letter aka “419” fraud

This is a rather complicated (not to mention famous) variation on the advance fee scheme. An anonymous scammer will contact a person, promising them a share of millions of dollars that, for numerous complicated-sounding reasons, the scammer cannot currently access. They ask for money to help them transfer the funds, often through illegal means. Needless to say, none of what the scammer is saying is true.

It’s called the “Nigerian Letter” scam because the most infamous version of this scheme involved a so-called “Nigerian prince” offering people millions of dollars to help him transfer his riches out of Nigeria. The really fun part of these schemes is when people stop paying, but the scammer can still use the financial information they have forwarded to spend the victim’s money and/or steal their identity.

The way to protect yourself from this scam is pretty simple: If you receive an email or a letter from someone claiming untold riches if only you can help them out with some money up-front, delete that email immediately and report the scammer to the FBI and the Federal Trade Commission (FTC).

5. Online vehicle sale scams

If you’re buying a used car online and you answer a classified ad, there is always a chance that you're being set up. Con artists love to post pictures of vehicles that they do not own and claim that the car is for sale at a ridiculously discounted price. There will often be a manufactured sense of urgency to the transaction; the scammer has to sell the car immediately because they are moving or being called up by the military, or it was a car they received in a divorce settlement or from a deceased relative.

These scammers will usually try to fake a relationship with a reputable online company and might even provide you with fake toll-free phone numbers to call and “verify” the transaction. But instead of having you send cash, they’ll ask you to buy a bunch of prepaid gift cards and then share the codes with them. Once you’ve done that, they vanish.

Yet again, this is a scam that can be foiled by copious amounts of research. Don’t just look into the seller, look into the car itself. Get it’s VIN or its license plate number and look them up to confirm ownership. Oh, and this is a piece of advice that holds true across every type of scheme: If the person you are communicating with asks to be paid in the codes from prepaid gift cards, stop. They are 100 percent scamming you.

6. Pyramid schemes

In a pyramid scheme, you are approached by someone who has a fantastic business opportunity. And while the business itself is often a real thing, it’s the way in which the business makes its money that can be fraudulent. Let’s say that the business here is something very simple: lemonade stands.

If you say “yes” and join the business, you are asked to pay your recruiter for the lemons you need to start your lemonade stand “franchise.” Your recruiter will then encourage you to recruit other “franchisees” who will then buy lemons from you. Not only that, but you’ll get a cut of any lemonade they sell, just as your recruiter gets a cut of all the lemonade that you sell.

Pretty soon, you realize that nobody in this lemonade stand business is actually selling lemonade. They are all just trying to recruit new people and make money off of selling them lemons. The people at the top of the scheme are doing quite well for themselves, while the people at the bottom are, well, not doing very well at all.

If someone offers you a business opportunity that involves buying a bunch of merchandise upfront to start your “franchise” and strongly encourages you to recruit new “franchisees,” stay away. Even some very large and successful companies have business models that verge on pyramid schemes—and can easily turn into one if you are preyed upon by a predatory recruiter.

To learn more, check out this blog post: Multi-Level Marketing Scams: How a MLM “Job” Could End Up Costing You Thousands.

7. Reverse mortgage scams

A reverse mortgage, also known as a home equity conversion mortgage, is a way for seniors to convert the value of their home into cash. Unlike more traditional home equity loans, a reverse mortgage doesn’t have to be repaid until the borrower moves out of the home, is no longer able to pay their mortgage, or dies.

A reverse mortgage in and of itself is not a scam. However, these loans have seen an explosion in popularity over the past 20 years, and that has created a fertile breeding ground for scammers and predatory lenders. Scammers often target seniors as a part of complicated “investment opportunities”, using the equity these people have built up in their home as a piggy bank for the scammer to finance their schemes. If someone promises you or your parent that you can “own a home for free or with no down payment,” that’s a sure sign that they’re not on the up-and-up.

If you want a legitimate home equity conversion mortgage, make sure that it is insured by the Federal Housing Authority (FHA). Be wary of advertisements for reverse mortgages, watch out for reverse mortgage seminars or people who approach you in social settings with reverse mortgage offers. And last of all, don’t sign any documents when you don’t fully understand the transaction.

8. Telemarketing fraud

This is a scam where a person calls you on your personal phone with a “fantastic offer” that you have never previously heard of or expressed any interest in. And even if it is something that you’d previously expressed interest in, you should still be very careful. If you see a call coming in on your cell phone from a strange number, let it go to voicemail. If it’s a real inquiry, they’ll leave a message. Scammers generally won’t.

The scammer will ask that you pay them for this opportunity or service, possibly in the form of prepaid debit card codes, a clear sign they’re not legit! If they’re telling you that you “won a free vacation” or some such nonsense, they might ask you to pay some fees or put down a deposit. Do not pay them, and especially do not read them your credit card info over the phone!

To avoid these scams, make sure you never do business with a company that contacts you out of the blue. Even though the person on the other line will try and pressure you to complete the transaction, you should resist them. Collect information from them and do research on the company. Make sure that the company itself is legitimate and that the person contacting you is indeed a representative of said company. The same goes for charities. In fact, this is one of the ways that scammers will try and take advantage of people in the aftermath of a natural disaster. That’s awful!

9. Ponzi schemes

Ponzi schemes will always be presented as an investment opportunity. You put your money into X business venture, and you will get a guaranteed return. These “opportunities” will usually be presented as somehow exclusive, the kinds of things that “regular” investors can’t get in on. Ponzi schemes are different than most scams, in that early investors will actually receive returns on their money! And, of course, they’ll be so pleased with the results that they will invest that money right back into the fund.

In truth, those returns that they’re receiving are a lie. Their money isn’t being invested at all. Instead, the scammer is taking money from new investors and is using that money to pay back their original investors. Eventually, the new money dries up, at which point the entire scheme collapses.

The scheme is named after its creator, Charles Ponzi, but the most famous Ponzi scheme was perpetrated by New York financier Bernie Madoff, whose $64 billion scam came undone during the 2008 financial crisis. Be extremely wary of anyone promising guaranteed or outlandish returns on your money. And always consult a third-party financial professional before saying yes to any opportunities.

10. Fraud against seniors

This last one isn’t exactly a type of scam. Frauds perpetrated against seniors run the whole gamut of scum and villainy. Senior citizens make perfect victims for fraudsters. They often have a lot of money saved up, they are generally trusting, and they have not-so-great memories which makes them really not-so-great criminal witnesses. If you or a senior you know are being scammed, contact the local authorities immediately.

And lastly, if you are a senior, and someone contacts you offering to sell you a product over the phone, hang up. We know it’s rude. That’s okay. They are trying to scam you, which is also rude. Hang up on them and be on your way.

California Residents, view the California Disclosures and Privacy Policy for info on what we collect about you.