Identity theft can impact your credit and finances in significant ways — some of which are hard to recover from. This makes it especially important to catch any signals of identity theft early before they can wreak havoc on your personal finances. Read on to see how identity theft can impact your credit and how…
Identity theft can impact your credit and finances in significant ways — some of which are hard to recover from. This makes it especially important to catch any signals of identity theft early before they can wreak havoc on your personal finances.
Read on to see how identity theft can impact your credit and how to best protect yourself and your wallet.
How does identity theft impact your credit score?
While there are different types of identity theft — some of which involve the stealing of medical information or even house titles — most practices involve gaining access to your Social Security number and other personal information that might allow identity thieves to open new accounts under your name.
A scammer with your SSN and other personally identifiable information (PII) can use these to apply for credit card accounts or loans without your knowledge. If they’re approved, they’ll typically rack up credit card debt or use up the loan funds without paying them back, leaving you with a credit report riddled with defaults and late or missed payments.
Because payment history and the amount of debt owed account for more than half of your credit score, multiple late payments, defaults, and/or maxed-out credit cards would bring even an exceptional score into the “poor credit” classification.
How to protect your credit from the effects of identity theft
The threat of identity theft cannot be overstated, but there are things you can do to mitigate its damage.
Monitor your credit report
Unfortunately, most victims of identity theft only find out about the fraudulent activity once they’re denied a loan or a credit card due to poor credit. This is why it’s so important to monitor your credit report, monthly if possible.
There are several ways you can do so.
You can request weekly credit reports from all three major credit bureaus (Experian, Equifax and Transunion) for free from AnnualCreditReport.com. While these won’t contain your score, you’ll be able to check the credit accounts and credit inquiries reported under your name.
And, if you see any you don’t recognize, you should dispute the suspicious activity with the credit reporting agencies immediately. While mistakes do happen and accounts for similar names could be reported in the wrong credit report, multiple new credit accounts that you did not open could be a sign of identity theft. Either way, you must contact the credit bureaus to correct the mistake as soon as possible.
If requesting the credit report and analyzing it is too time-consuming, you should consider credit monitoring or identity theft protection services, some of which are free. These services alert you if your personal information has been compromised and will also notify you of any changes in your credit report.
If you have a credit card from a major bank such as American Express, Chase, or Discover, make sure to check your benefits as free credit monitoring might be one of them.
Freeze your credit or place a fraud alert
If you find out you’ve been the victim of ID theft or you’ve been informed that your personal info was leaked in a data breach, freezing your credit or placing a fraud alert might be good next steps.
A credit freeze is a process whereby bureaus limit third-party access to your credit history. If someone were to try to apply for a new line of credit while your credit is frozen, the lender would not be able to access your credit history and would deny the application.
For this to be effective, you’ll need to place a freeze individually with each credit bureau, but you can do so in a matter of minutes from their websites by creating a free account. Whenever you’re ready to apply for a line of credit, you’ll need to go to that same site and lift the freeze or “thaw” your credit.
A fraud alert is slightly different and is typically placed once you know you’ve been a victim of ID theft. You’ll only need to contact one credit bureau, which will notify the others. With a fraud alert in your credit file, if a bureau receives a request to review your credit as part of an application, it will notify the lender that it needs to take extra steps to confirm the identity of the person who’s making the application. This means that they should contact you directly and ask whether it was you who filled out the application.
Repair any damage to your credit
If the fraudsters’ actions have already hurt your credit, you should start taking immediate steps to repair it.
First, dispute any incorrect items with the credit bureaus and lenders themselves. Note that this will be easier if you have proof that your identity was stolen. Check out our article on Detecting ID Theft — And The 5 Steps You Need To Take Immediately for the steps you need to take.
If your credit has been substantially damaged and there are multiple accounts already listed in your report, you could consider a credit repair company. These companies will examine all your reports for negative items and dispute incorrect or unfairly reported information for you.
Identity theft can significantly affect your credit history, as these types of scammers can apply for credit accounts and accumulate large amounts of debt in your name. This can damage your credit score, leading to higher interest rates and making it harder to get approved for new credit lines.
Luckily, there are steps you can take to stop identity thieves and get your credit history back in shape.
Impact of identity theft on your credit
When identity thieves steal your personal information, they typically use it to open credit cards, take out loans, or apply for utility services (like water, gas, or internet) in your name. They can then leave these accounts unpaid for months, leading to late payments and significant amounts of debt being reported on your credit report.
The two most important factors influencing your credit score are your payment history and the amount of debt you owe. As missed payments and high outstanding balances from fraudulent accounts start to show up on your credit history, your score might drop around 100 points or more.
You’ll then have a hard time qualifying for credit cards, personal loans, mortgages, and other financial products. You’ll also pay higher interest rates and have lower credit limits when you do get approved.
How to repair your credit after identity theft
Repairing your credit after identity theft typically involves disputing incorrect information with credit bureaus and working with creditors to close any fraudulent accounts. However, there are additional steps you should take to safeguard your creditworthiness.
Here’s what you should do:
1. File a report with the FTC and local police
Start by reporting the fraud to the Federal Trade Commission (FTC) through IdentityTheft.gov. This will generate an official report you can use to notify your creditors and ask them to close fraudulent accounts or refund unauthorized transactions.
Based on the information you provide, the FTC will also create a personalized identity recovery plan with steps you should take to stop fraudsters in their tracks and fix your credit. You can either print your plan or set up an account on the FTC’s website where you can track your progress. You’ll also get access to pre-filled letters and forms you can send to credit bureaus, creditors and debt collectors.
2. Check your credit report for fraudulent accounts
If someone has used your information to take out credit cards or loans, these fraudulent accounts will show up on your credit reports. These accounts will damage your credit score as the fraudster racks up debt and doesn’t pay it.
To avoid this, check your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) for accounts you don’t recognize. You can get free copies of your reports through AnnualCreditReport.com.
If you find any fraudulent accounts on your reports, contact the bureau that is reporting the account and ask them to remove it. You can file a dispute online, by phone, or by mail.
3. Contact your creditors to report suspicious accounts
Besides filing a dispute with the credit reporting agencies, you should also report the account to the creditor who opened the fraudulent account.
You can find the creditor’s name in your credit report, along with the date the account was opened, the type of account, and other information you can mention when reporting the account. Note that the creditor might ask for a copy of your FTC identity theft report and a police report to confirm you’re a victim of identity theft.
4. Place a fraud alert on your credit reports
Fraud alerts let creditors know your personal information has been exposed to a fraudster, so they should take extra steps to verify your identity before opening any new accounts in your name.
There are two types of fraud alerts: initial and extended. Initial fraud alerts are available to anyone and last one year. However, if your identity has been stolen and you filed a report with the FTC, you can opt for an extended fraud alert. These last seven years, they also stopped companies from sending you pre-screened credit card and insurance offers for five years.
You can place a fraud alert by calling the credit bureaus or through their website. You don’t need to notify all three bureaus — the first one you contact will inform the other two.
5. Freeze your credit reports
A credit freeze goes a step further than fraud alerts and blocks access to your credit report.
When you freeze your report, lenders can’t see your credit history, so they won’t open new accounts in your name. This effectively stops fraudsters from applying for credit using your personal information.
To freeze all three of your credit reports, you’ll have to call each bureau separately. You can also place a credit freeze online if you create an account with the bureaus. The freeze will stay in place until you lift (or thaw) it.
Should I hire a credit repair company?
Credit repair companies help individuals improve their credit scores by reviewing their credit reports for inaccuracies or outdated information that is impacting their creditworthiness. They then work on your behalf to dispute these errors with the credit bureaus and creditors.
Hiring a credit repair company can be helpful if your credit report has multiple fraudulent accounts and you’re unsure how to dispute them yourself — or have little time to.
Still, keep in mind that many credit repair companies charge significant setup and monthly fees, sometimes exceeding $100. This can be a steep price to pay, especially since you can repair your credit yourself for free. Also, watch out for credit repair scams; avoid companies that promise to delete all negative items from your credit report, even those that are correct.