Ready to cash in all those holiday gift cards? Make sure you know the scams fraudsters are using and how to avoid them.

You choose the perfect gift, enter your gift card code, click “Purchase,” and discover that the $100 gift card Aunt Betty gave you has no funds. Happy holidays!

It's no secret that gift cards are an attractive option for holiday shoppers who can't decide on the perfect gift or just don't have time to battle the mall masses. In fact, according to a consumer survey conducted just this last November for the National Retail Federation (NRF), 56 percent of shoppers were planning to purchase gift cards.

Sadly, fraudsters have perfected a plethora of creative schemes for draining a gift card of its funds before the card recipient ever gets to use them, reducing the card to a worthless piece of plastic. But before we get into the techniques fraudsters use to drain gift cards, let's cover how can you avoid becoming a victim of gift card fraud.

Types of gift cards

Gift cards come in two main forms: traditional store cards and cash cards. Store cards can be purchased for a specific retailer with a pre-loaded amount of money or an amount that you specify. The recipient can then spend the funds at the business indicated on the card. Cash cards are cards sponsored by major credit card companies (Visa, MasterCard, etc). Once loaded with money, they can be used to make a purchase anywhere credit or debit cards are accepted.

4 Common Types of Gift Card Fraud

The following list, compiled from and and Fraud Guides, illustrates how fraudsters can drain the funds from a gift card.

  1. A fraudster steals the code and purchases online or by phone

    Fraudsters steal the number on the back of a gift card and then periodically check to see if the card has been purchased, activated, or loaded with money. At that point, they use the card and drain the funds by making purchases online or over the phone where the physical card isn’t needed, just the PIN or other code.
  2. A store employee uses the card and replaces it in the packaging

    To some employees, gift card display racks are like money growing on trees. They use the cards and then replace them, putting them back in their envelopes or packaging as though they’ve never been opened. In many cases, the gift cards may be located behind a counter or in a locked case, giving you the impression that they’re completely safe.
  3. Thieves replace cards with blanks or counterfeits

    In this scheme, the scammer replaces real cards with a drained or counterfeit card. When the barcode on the packaging gets scanned, activating the card, the purchaser is left with a fake or empty card while the scammer holds an activated card with funds.
  4. Card resellers inflate the card value or sell an emptied card

    Often, a scammer will try to sell a card on a classified ads site like Craigslist. If you’re a trusting person, you may be taken in by someone selling a worthless card. Even if they verify the amount on the card while you’re there, they may use the funds online the moment you walk out the door if they have seen the code. Even reseller sites can end up inadvertently selling cards that have inflated values or no money on them at all.
How to stay safe

Of course, it's difficult to avoid the headache of finding out that a card gifted to you has, in fact, already been emptied. However, you can take steps to avoid falling victim to gift card fraud when you're on the giving end.

Before you purchase a gift card, examine the card and packaging to make sure someone hasn’t scratched off the code concealment strip or tampered with the packaging. You can also ask the cashier to scan the card after you’ve purchased and activated it to verify that it’s not a counterfeit and has the correct amount of money on it.

Or you can go the easy route and simply give the gift that everyone loves - cold, hard cash!

iovation is a leading provider of online fraud prevention solutions to help stop ecommerce fraud, online banking fraud, insurance fraud, account takeover, and other common types of internet fraud.