Gift card scams are on the rise: Here's how to avoid them

Next time you think about getting a gift card from the display rack as a last-minute gift, you might want to think again. According to the Federal Trade Commission, gift card scams accounted for $217 million of the more than $10 billion U.S. consumers lost to financial scams in 2023.

There are several ways fraudsters can manipulate gift cards.

One of the most common gift card scams combines phishing and social engineering. In this type of fraud, a scammer impersonates one of your family members or coworkers, asks you to purchase gift cards and then requests that you give them the numbers so they can use the gift cards themselves.

Related: How to use points and miles to give gifts with zero out-of-pocket cost

They will promise to reimburse you later, but because they aren't who they say they are, your repayment never comes. I've received several such requests, but I was aware of this scam and knew not to fall for the scammer's wily ways.

Another gift card scam, called gift card draining, is also on the rise. This one doesn't include getting a suspicious text message from your long-lost aunt asking you to buy her an Apple gift card, so it can be harder to spot.

TPG spoke with Frank Teruel, a cybersecurity expert and chief financial officer at Arkose Labs, to learn more about gift card draining and how to protect yourself.

What is gift card draining?

With gift card draining, fraudsters tamper with the physical gift cards before they are purchased.

"Scammers can actually grab a bunch of unused gift cards from the store and take them home to disassemble them," Teruel told TPG. "They can use exacto knives or similar tools to open the cards very carefully and copy down the barcodes and pin numbers [or physically cut the important numbers off the card] before reassembling them and returning them to the store."

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Related: Save money! 7 ways to redeem American Express Membership Rewards points for holiday gifts

When an unsuspecting shopper picks a tampered-with gift card off the rack and activates it, the fraudster has immediate access to the funds loaded onto the card. Once the scammer has the numbers on the back of the gift card, they can register it online through the provider as if they had purchased it.

"There's no money on the card, but as soon as someone comes along and buys it, the funds will go directly into the account the fraudster created," Teruel explained.

Gift card draining can go unnoticed for weeks or even months because people often don't use gift cards as soon as they receive them. When the recipient gets around to using the card, the scammer has already drained the funds.

This type of gift card scam became so prevalent during the 2023 holiday season that several law enforcement agencies, including the Miami Police Department and the Pinole Police Department in California, released safety videos warning consumers of this growing scam.

Protecting yourself from gift card scams

Why are fraudsters targeting gift cards? Because they are harder to trace and lack the same protection against unauthorized transactions as credit cards or bank accounts. With a credit card or bank account, your institution knows your spending patterns. They can see where you live and where you spend your money, which can help with fraudulent charge investigations. With gift cards, you don't have that same sort of evidence to make a case that it wasn't you who spent the money.

Here are a few tips to avoid gift card draining scams and the steps to take if you do fall victim.

Be careful about where you purchase gift cards

Avoid purchasing gift cards from online retailers you've never heard of or who are selling deeply discounted gift cards. "Typically, those cards have been purchased using stolen credit cards, or you are dealing with a nefarious seller who wants to capture your information," Teruel said.

Related: What credit cards should you use to purchase gift cards?

Even at a major retailer, you are better off purchasing gift cards from a store that keeps them in a secure location. Teruel used Costco as an example.

"If you go to Costco's gift card section, they just have cardboard cards for display. You take that display card to the cashier, they'll scan it and then you go to a separate counter to get your gift card. The chain of custody is never broken, making tampering with these cards impossible," he said.

Inspect gift cards before you buy them

Regardless of where you purchase a gift card, inspect it carefully before you purchase and activate it. The FTC advises checking to see if the protective stickers on the card are still intact and untampered. You should also ensure the back's PIN number isn't visible. If anything seems "off," show the gift card to the cashier and pick a different one.

Always keep a copy of the gift card and the receipt

The FTC also recommends keeping a copy of the gift card (you can take a photo of the front and back with your smartphone) and your original store receipt. If you need to report fraudulent activity, having these numbers handy will help.

Register the card as soon as you purchase or receive it

If you purchase a gift card for yourself, register it or check the balance through the retailer or brand's website as soon as you get home. If you receive a gift card, do the same — even if you don't plan to spend the funds immediately. If you register the card and see that it is empty or has already been registered, immediately report it to the retailer. The sooner you do this, the better your chance of recovering the stolen funds.

Don't let gift cards sit unused for too long

The longer you wait between purchase and redemption, the harder it may be to reclaim your money.

"You want to access the cash as quickly as possible because when the cash sits idle, you create more opportunity for fraud," Teruel said. "This helps in two ways. Number one, you immediately get your cash and know it is a legit card. Two, it's a lot easier to report fraud a few hours after you bought the card versus weeks or months later."

Report gift card fraud to the retailer

"As soon as you or the recipient realizes something is wrong, report it to the retailer immediately," Teruel said. Because this type of scam has become so prolific, they may be able to provide recourse. If not, you may be able to report the incident through your credit or debit card. Banks and credit cards will not hold you liable for fraudulent purchases, though policies regarding gift card fraud may vary per institution.

If you've realized that you may have fallen for a gift card scam, the FTC has instructions on the next steps you should take and the phone numbers of several popular gift card merchants.

File a report with the FTC and local law enforcement

Reporting fraud to the FTC helps them fight fraud and stay on top of the latest scams. You can file a report online through the FTC website. The same is true of local law enforcement. Reporting fraud can aid their investigations and, in turn, help other consumers.

Bottom line

Gift card fraud is on the rise, and scammers will continue looking for ways to easily access "free" money. If you're going to purchase a gift card in the near future, do your due diligence to protect yourself and the person you're buying the card for. There are several steps you can take to avoid falling for gift card grifts.

Related reading:

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• How to avoid vacation rental scams this summer
• Flyer beware: Don't fall for this airline customer service scam
• Cruise scams: Why you should toss that 'free cruise' card in the trash