Consumer Blog

With all the news lately about a massive Ponzi scheme that allegedly defrauded investors of $50 billion, you may be wondering about the difference between this and a pyramid scheme.

The terms are often used interchangeably, but there is a difference. A Ponzi scheme is basically a passive investment scheme. You pay in your money, wait and eventually get a return on your investment. All the organizers ask for is your money. You can recruit other people to invest, but you don't have to.

A pyramid scheme, however, requires that you become involved in the business to make money. So you pay to get in, then you have to recruit others to join before you get paid.

Thus here's a big difference between the two: Ponzi schemes usually have innocent victims. Pyramid schemes, however, don't. By participating in the business, you are likely to be called a co-conspirator by any prosecutor or lawsuit that tries to shut the scheme down.

Here's the similarity: In both cases, money from new investors goes to pay off earlier investors. The reason these scams are illegal is that there are not enough people on earth to guarantee returns for all investors.

This chart from the US Securities and Exchange Commission shows how quickly one of these schemes will run out of potential investors. Note that after just a dozen levels or so, you would need more people than the entire population of the world to keep things going.

We expect to see the scam artists crank up their efforts to take advantage of people who may be in financial need due to the current economic problems. Three scams to watch for in this climate:

• Phishing scams - these are ever-popular, but with consumers nervous about their bank accounts and investments and the safety of both, the crooks may try to cash in on that. For example, you've been hearing news for months about the down market on Wall Street. Then you get an e-mail that claims to be from your investment house saying there's a problem with your account. That may get your attention. So remember, rule #1 of identity theft is never give out your personal information to anyone who contacts you.
• Work-at-home scams - with consumers feeling a financial pinch, they may look to make extra money while working from home. Check out the tips from our consumer encyclopedia on this topic. There are plenty of good ways to make money from home, but there are also scams.
  First red flag is unsolicited contact. To get a good work-at-home opportunity, you need to go out and find it. Any contact that comes to you, by phone or e-mail, is probably a scam.
  Second red flag is a request for money up front for processing fees, etc. You should never pay to get a job. Remember, they're supposed to pay you.
• "Rescue" scams - this could be credit repair, foreclosure rescue or some other apparent service that will get you out of a jam. Remember that no one can remove negative information from your credit report if it's accurate. Only time and good discipline will improve your credit score. And we've seen plenty of cases of foreclosure rescue scams, including the lawsuits we brought in Operation Stealing Home.
  If you're looking to hire a company to help you solve a problem, first check them out for consumer complaints using our KnowMO feature.

We released our annual consumer alert recently on giving wisely to charity. This is typically a busy time of year for charitable contributions, with consumers wanting tax breaks and charities ramping up their fundraising efforts.

Three pointers, detailed in the consumer alert linked above:

• Never give credit card or other personal information to solicitors or anyone else who contacts you
• Check out how the charity spends its money using our online Check-a-Charity feature
• Plan your giving a year at a time so you're not trying to decide on the spot based on phone calls or mailings

In a buyer's market such as this, it's hard for a lot of homeowners to sell their houses. So people are calling our office asking if they can hold a raffle to unload their house. They might charge $1000 a ticket, hoping to get 150 or 200 people to buy tickets - thus raising $150,000 or $200,000. Then they hold a random drawing to determine the winner.

The answer is no. This would be an illegal game of chance under Missouri's gambling law. An illegal raffle is defined by three things:

• Purchase is required to enter (the $1000 ticket)
• Winner is determined by chance (random drawing)
• Winner wins something or value (house)

You can only legally hold these raffles in Missouri if you're a charitable or religious organization, designated by the federal government.

So then some people think up ways they hope will get around the gambling law - hold a contest to see who wins - such as a letter-writing or essay contest. They argue that's a game of skill - not chance - so it's now legal. That may be a hard sell. All we can say is be prepared to defend yourself in court if a law enforcement agency challenges your raffle, calling it an illegal gambling operation.

A major announcement came this week from Attorney General's Offices across the country, including ours. Toy maker Mattell reached a settlement with several different states including Missouri, agreeing to pay fines and reduce the amount of lead in their toys.

For years the acceptable standard under federal law has been 600 parts per million of lead - and that only applied to the paint. Lead prevention advocates have long insisted that no amount of lead is safe and therefore that number should be much lower. Federal law will kick in next year that lowers that standard to 90 parts per million. In the settlement with the AGs, Mattel has agreed to start complying with the 90 ppm standard immediately - that's a couple of months ahead of the federal law kicking in.

The new federal law is a significant victory. It of course will apply to all manufacturers of children's products. And besides the paint content, it for the first time regulates the lead content of the metal, plastic or whatever else might be underneath. Toy makers have some time on that one - they have to get those levels down to 100 ppm by 2011.

Our office conducted two lead testing events for the public in 2007, and it was shocking to see the amount of lead in some of the toys people brought to us. Some new toys were in the thousands of ppm. The most memorable was an old toy tractor that had 85,000 ppm - 140 times the federal threshold.

 PS: Check out our online clearinghouse that lists recalls of toys, food, drugs and other products.

Businesses with PBX phone systems have been the latest pawns in the phishing scams run by identity thieves. "Vishing" is the term used for a phishing scam that uses the phone, rather than e-mail. Law enforcement around the country is warning that phishers are now taking over PBX systems and using them to make mass robo-calls to try to steal people's personal information. If you've ever worked in an office, you've probably used a PBX system. It handles incoming and outgoing calls, extensions, outside lines, voice mail, call transfering, etc.

Thieves are taking over PBX systems because a) those systems usually have a lot of lines available for mass calling and b) it allows them to look like they're calling from somewhere else.

So if you run an office and use free software to run your PBX system, get in touch with your software provider to make sure it's updated to handle the latest threats. This is similar to how you should handle your computer security - use anti-virus, a firewall and spyware detection, and make sure all of them are updated.

A great way to stay on top of your credit card account, avoid fees and detect fraud is to sign up for alerts from your card company. There are lots of different alerts you can sign up for. Here are some that my credit card offers:

• Balance getting high - they send you an e-mail any time your balance goes above a dollar amount that you choose. ie, you tell them "Send me an e-mail if my balance goes over $2,000."
• Balance update - they e-mail you as often as you want with your balance. ie, "E-mail me once a week with my balance"
• Credit getting low - they e-mail you if your available credit drops below the dollar amount you choose. ie "E-mail me if my available credit is less than $2,000." Your available credit is the difference between your credit limit and the amount you owe, or balance.
• Available credit update - they e-mail as often as you want with your available credit
• Large purchase alert (this is my fave, as a consumer advocate and identity theft prevention guru) - they e-mail you any time there's a charge on your account of more than a dollar amount you choose. ie, "E-mail me any time there's a charge of more than $80." This is an effective way to detect unauthorized charges as soon as they happen. Of course, you'll find out about any unauthorized charges within a month or less because you always check your credit card statement at least monthly.

We often say the safest way to make purchases on the Internet is with a credit card, because federal law protects credit transactions from fraud. That law does not protect you using your debit card, PayPal, money orders, wire transfer, etc.

You can take this one step further by asking your credit card company for a single-use credit card number. It's also called a virtual number. This a temporary number (assigned to your account) that's good for a limited number of purchases - maybe one or a few more - and after that, it's invalid. Thus, if that number gets into a thief's hands, it won't do him any good.

This article from bankrate.com explains things further, including some cases where you don't want to use this type of account number.

You often hear about steps you can take to increase your credit score (like pay your bills on time, etc) and steps that can lower your score. But how much will those things affect your score - and by how many points?

A federal government publication has some nice examples of real-life scenarios and the impact they have on your score. Scroll about half way down this page to see the examples. Maybe you can relate to some of these situations.

PS: Check out our earlier blog post about the factors that make up your score. And this post gives you a free credit score estimate.

There is a relatively new type of annual survey being done by the US Census department. This is different from the one that's long been done every 10 years. This one is the American Community Survey, or ACS, and it probes much deeper and is mandatory. You can be fined up to $5000 if you don't complete the form, which the Census says takes 38 minutes to do.

A lot of people are uncomfortable with the mandatory nature of this. It asks a lot of personal questions like race, income, do you have running water, how much are your heating bills. And it asks your name - so it's not anonymous.

Regarding identity theft, there are no questions on here that jump out as a threat. The ACS does not ask your Social Security, bank account or credit card number.

If you get any survey asking for those things, that should be seen as a fake and a scam. If you get a survey, it should look like this. If it doesn't, call 1-800-354-7271. That's the ACS number, and an operator can help you determine if your survey is authentic.

You may have heard of Angie's List - the service you pay for that recommends and gives reviews of companies. Everything from plumbers to dog-walkers is listed in there, and real customers tell you what it was like to work with those companies. The service is available in a lot of big cities, and it's localized to each city. But if you're not in one of those areas, it won't do you any good.

A small town near the Lake of the Ozarks has come up with its own free version. The town of Laurie created the Helpers for Hire program years ago, so that the local folks would know the reputable contractors and service providers. Wouldn't it be cool if other cities big and small could do something like this?

After all, one of our four consumer rules to live by is: work with companies that are known to you or recommended by someone you trust.

We told you during election season that all automated telemarketing calls, even those from politicians, must give you a phone number you can use to opt out of future calls. Now the Federal Trade Commission has taken it a step further.

This won't help you with political calls (which are exempt) but it does apply to calls selling goods and services and charity fundraisers. These robo-calls must now allow you to opt out of future contact by simply pressing one button or saying one word. And if your answering machine gets the message, they have to give you a callback number that allows you to opt out without talking to anyone.

It is a violation of federal law for a telemarketer to contact you if you have asked them not to. You can file complaints against telemarketers with our No Call office here.

This week we put out our annual warning with dos and don'ts when buying on the Internet during the holidays. Of course, these rules apply to other times of the year too. The biggest rule might surprise you: pay with a credit card.

That's the case, according to this USA Today story. Apparently when gas prices are high, gas stations keep their profits to a minimum, hoping not to get customers any more riled up than they already are.

But when prices are low, retailers have the opportunity to make a little more profit. And the customers don't mind because they're just relieved that prices have come down so far. Interesting read.

Will gift cards be the popular gift they've been in previous years? Last year it's estimated Americans bought more than $25 billion in gift cards just during the holidays.

You might give cash or checks to your loved ones this year - because, as you may have noticed, some stores are either going out of business entirely, closing some locations or filing for bankruptcy. In any of those things happens with a gift card you've given, it may not be usable. KMBC-TV out of Kansas City did a story that expains more about this.