I hate writing these kinds of stories.
On the one hand, it will help those who are currently doing -- or thinking about doing -- what I am about to write about. On the other hand, there will be some readers who will now go out and do exactly what I am trying to dissuade them from doing. That said, I can't control what my readers do. They'll do what they're going to do.
Here's the deal. A reader of mine got a call from American Express yesterday. Turns out that American Express wants to know about a particular purchase that was made on this person's American Express card. Why? The Amex card was used to fund a purchase that ultimately got funneled through a Paypal account. Let me explain.
It works like this: you buy something. The person on the other end of the transaction has a Paypal account and allows you to pay for the purchase using your American Express card. That's usually not a problem. However, it is a problem when you're on the other side of the transaction as well. Or when you have a friend who is on the other side of the transaction -- and the transaction is nothing more than a sham.
People do these kind of sham transactions when they need cash. If you "purchase" something from a friend who happens to have a Paypal account, the friend could simply turn around and hand the cash back over to you. Think about it. I could pretend as though I am buying something from a friend -- even if there isn't a product to buy. The friend will take my American Express payment and then turn around and hand the proceeds over to me (minus the Paypal transaction fee). It would look like a purchase in every way.
Except, it would really be nothing more than a cash advance. American Express, if it knew that I was doing this, would be highly interested. That's because I would be depriving American Express from collecting interest from the cash advance (at more than 20%). Instead, I would be getting the purchase APR if I could effectuate a transaction through Paypal. So, American Express cares.
But here's a twist. Some people have been known to use these sham Paypal transactions to do things that are not allowed by credit card companies. For example, card companies (we'll use American Express here) do not allow customers to use one card (an American Express Blue card) to pay off another card (an American Express gold card, for example). It's just not permitted. You cannot take two cards from the same card company and use them to pay off balances. Throw a sham Paypal transaction into the mix, though, and you can see exactly how to get around that rule.
By using Paypal, though, you could make a "purchase" and then take the proceeds from that "purchase" to fund your other credit card from the same company. In our hypothetical, I would use the Blue card to make the purchase. Then I would use the cash proceeds from the transaction to pay off my gold card balance. That's a big no-no. And this is exactly what got my reader into trouble. The reader must now explain the purchase to American Express.
If you've ever read your American Express card agreement, you've seen the disclosure saying that you can only use your card for goods and services. Of course, you can also use the card for cash advances, but you will be assessed a huge interest rate for the trouble. You cannot use your card to make a fake purchase (at the purchase rate) and then pocket the cash (without being assessed the cash advance rate).
American Express is very hip to this game, by the way. Paypal purchases are always scrutinized by American Express. They're scrutinized because it's so easy to do what I've just described. Small purchases won't likely gain anyone's attention at American Express, but you can bet your bottom dollar that big purchases won't go unnoticed.
American Express, once it has flagged your account, wants to know two things: one, are you essentially doing a cash advance or balance transfer? And, two, are you broke? Indeed, if you are doing these kinds of sham transactions, you're likely strapped for cash. If you're strapped for cash, and doing these kinds of deals, then you're likely a high-risk customer to American Express. If you're a high risk to American Express, it's going to reduce your limit substantially or cancel your card altogether.
If you're going to do these kinds of Paypal transactions, don't use American Express to do it. They're on top of the game when it comes to this stuff. Better still, just don't do it at all. Indeed, this is not the credit environment in which to test the cards companies' computer systems.
More likely than not, you're going to get caught.