The increase in gift card scams: Tips to steer clear of them

Before grabbing a gift card from the rack as a quick present, think twice. According to the Federal Trade Commission, gift card scams contributed to $217 million of the over $10 billion lost by U.S. consumers to financial scams in 2023.

Fraudsters have various tactics to exploit gift cards.

A prevalent gift card scam involves phishing and social engineering. In this scheme, a scammer poses as a relative or colleague, requests that you buy gift cards, and then asks you to share the card numbers for their use.

They may promise to pay you back later, but since they're not who they claim to be, you'll never see that repayment. I’ve received several such requests, but I recognized this scam and avoided falling for their tricks.

Another emerging scam known as gift card draining is gaining traction. Unlike typical scams that involve a sketchy text from a distant relative asking for an Apple gift card, this one can be more difficult to detect.

TPG consulted with Frank Teruel, a cybersecurity expert and chief financial officer at Arkose Labs, to gain insights into gift card draining and strategies for safeguarding yourself.

What exactly is gift card draining?

In the case of gift card draining, fraudsters manipulate the physical gift cards prior to their purchase.

"Scammers can actually take a bunch of unused gift cards from the store and bring them home to dismantle them," Teruel shared with TPG. "Using exacto knives or similar tools, they carefully open the cards to jot down the barcodes and PIN numbers [or physically cut off the critical numbers from the card] before putting them back together and returning them to the store."

When an unsuspecting shopper selects a tampered gift card from the rack and activates it, the fraudster gains instant access to the funds loaded onto the card. Once they have the numbers on the back, they can register the card online through the provider as if they had bought it themselves.

"The card appears to have no money, but as soon as someone purchases it, the funds are redirected to the fraudster's account," Teruel clarified.

Gift card draining can remain undetected for weeks or even months because recipients often delay using the cards. By the time they decide to use it, the scammer has already emptied the balance.

This type of gift card scam became so widespread during the 2023 holiday season that various law enforcement agencies, including the Miami Police Department and the Pinole Police Department in California, produced safety videos to alert consumers about this escalating scam.

How to protect yourself from gift card scams

Why do scammers target gift cards? They are more difficult to trace and don’t provide the same safeguards against unauthorized transactions as credit cards or bank accounts. With a credit card or bank account, your financial institution can track your spending habits and locations, which aids in investigating fraudulent charges. Gift cards, however, lack such evidence to demonstrate that you weren't the one who used the funds.

Here are some tips to help you avoid gift card draining scams and what to do if you find yourself a victim.

Exercise caution regarding where you buy gift cards

Steer clear of buying gift cards from unfamiliar online retailers or those offering significantly discounted cards. "Often, these cards are purchased with stolen credit cards, or you might be dealing with a shady seller looking to steal your information," Teruel warned.

Even at well-known retailers, it’s advisable to buy gift cards from stores that secure them properly. Teruel pointed to Costco as a prime example.

"At Costco's gift card section, they only display cardboard cards. You take that display card to the cashier, who scans it, and then you go to a separate counter to collect your actual gift card. This ensures the chain of custody remains intact, making it impossible to tamper with these cards," he explained.

Examine gift cards thoroughly before purchasing

No matter where you buy a gift card, inspect it closely before you purchase and activate it. The FTC recommends checking that the protective stickers on the card are intact and untampered. Additionally, make sure the PIN number on the back isn’t exposed. If anything looks suspicious, show the gift card to the cashier and choose a different one.

Always keep a copy of your gift card and the receipt

The FTC also suggests taking a picture of both the front and back of the gift card with your smartphone, along with keeping your original store receipt. This way, if you need to report any fraudulent activity, you'll have the necessary information on hand.

Register the card immediately upon purchase or receipt

If you buy a gift card for yourself, make sure to register it or check its balance on the retailer's 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 use it right away. If you find that the card is empty or has already been registered, report it to the retailer right away. The quicker you act, the better your chances of recovering any lost funds.

Avoid letting gift cards go unused for extended periods

The longer you delay redeeming a gift card after purchase, the more difficult it may become to recover your funds.

"You should try to access the funds as quickly as possible because leaving money idle increases the chances of fraud," Teruel explained. "This benefits you in two ways: first, you get your cash immediately and can confirm it’s a legitimate card; second, it’s much easier to report fraud a few hours after buying the card than weeks or months later."

Notify the retailer about gift card fraud

"Once you or the recipient notices an issue, contact the retailer right away," Teruel advised. Given the prevalence of this scam, they might be able to assist you. If not, you could report the situation through your credit or debit card. Banks and credit card companies typically won’t hold you responsible for fraudulent transactions, though policies regarding gift card fraud may differ by institution.

If you suspect you've fallen victim to a gift card scam, the FTC provides guidance on what to do next, including contact information for several major gift card brands.

Report the incident to the FTC and local authorities

By reporting fraud to the FTC, you help them combat fraudulent activities and keep informed about emerging scams. You can submit a report online via the FTC's website. The same applies to local law enforcement; your reports can support their investigations and assist other consumers.

In summary

Gift card fraud is increasingly prevalent, and scammers are constantly seeking ways to exploit unsuspecting individuals for "free" money. If you plan to buy a gift card soon, take necessary precautions to safeguard yourself and the recipient. There are multiple strategies you can employ to avoid falling victim to these schemes.