According to a research carried out earlier this year (2020) by javelin, identity theft is still a major threat to business. The research and advisory firm revealed that more than 500,000 identity fraud reports are made each month to the federal trade commission that result to a median loss of $200.
What is identity theft?
It is a situation where a person obtains your personal details without your permission and uses them to commit a crime/fraud. There are four types of identity theft. These are medical theft, child theft, criminal theft, and financial theft. Statistics show that financial theft is the most common type of identity theft. This is where a person uses your financial information like bank account or credit card numbers to make purchases or open a new credit card. The possibilities of what a fraudster can do with your financial details are limitless.
In order to understand how financial identity theft affects your credit score, we need to know how credit scores are calculated.
Factors that influence credit score
1) Your payment history
Payment history accounts for 35% of your credit scores. It is determined depending on whether you pay your credits on time or days past the due dates. Frequently missing payments or paying 30 days after the due date can result to a drop of 100 points or more.
How does identity theft affect payment history?
When an identity thief opens a new credit or uses funds from an existing one, they are not planning to make payments. Even though you are not responsible for the fraudulent charges made in their name, it will still take time before the removed charges reflect on your report. Within this period, you will have missed several payments and your score will be lower.
2) The amount you owe lenders and creditors
It is also referred to as the credit utilization or the debt level, and it accounts to 30% of your credit scores. It is determined in the aspect of the total amount of the debt and the ratio of the overall amount versus the amount you have paid. Creditors recommend credit utilization of 30% or below. That is, the ratio of your card limit in relation to your card balance.
How does identity theft affect your credit utilization?
Identity thieves are interested in large amounts of fast money. This means running up credit balances fast before they are caught. The high balances incurred will lead to high credit utilization, sometimes even above the recommended 30%. This will lead to a decrease in your overall credit score by 45 points.
3) Length of credit history
It accounts to 15% of the overall score and is determined by the age of your oldest credit account and the average age of all your credit accounts. The longer the length of your credit history, the higher the credit scores. Having a longer credit history shows credibility and responsibility in paying off debts.
How does identity theft affect the length of your credit history?
Identity thieves open several lines of new credit accounts in your name. Doing this shortens the average age of your credit accounts. This will negatively affect your score since responsibility and credibility are compromised.
4) The number and type of credit inquiries
There are two types of inquiries: hard and soft. Soft inquiry is free and does not affect your credit score. When you apply for credit to finance big projects like cars or buying a home, creditors will carry out a hard inquiry. Having a high number of hard inquiries at a short duration will affect your credit score.
How does identity theft affect credit inquiries?
Every time an identity thief applies for credit to finance big projects, you receive a hard inquiry on your credit report. For each inquiry, your credit card scores lower by five points. The higher the number of inquiries is, the lower the credit scores. It is important to note that all inquiries will remain on your report for 24 months (2years).
What are the first signs of identity theft?
- Unexplained withdrawals from your bank account
- Unfamiliar account and charges on your credit report
- Failing to receive bills or mails
- Notifications for filled tax returns
- Receiving calls from debt collectors on debts that you know nothing about
- Your checks get rejected often
- Getting data breach notifications/asking for data verification
What should you do if your identity is stolen?
- Notify companies of your stolen identity
- File a report with the FTC
- Notify you local police department
- Follow up and place a fraud alert on your credit cards
- Review your credit reports and report mysterious accounts
How to protect your identity
- Always pay close attention to errors and any suspicious activity in your financial accounts. This includes both bank accounts and credit card accounts.
- Always use strong passwords or use a password manager to help you generate, store, and input secret passwords. This will not only keep hackers out of your accounts but also your personal business. Avoid using birth date, anniversary, or wedding date as passwords.
- Consider placing a fraud alert on all your credit reports. It is free and it will ensure lenders and creditors are aware that you are a victim of identity theft. Therefore, they will be keener and will not open accounts that you did not apply personally.
- Freeze your credit accounts. A credit freeze prevents new accounts from being opened in your name since it locks your credit reports. This way, lenders cannot pull them.
- Apply for a credit monitoring service
This service helps you track your credit reports consistently. It notifies you of changes or any suspicious activity.
From the above discussion, it is clear that you need to pay attention to your accounts activity consistently. When you notice any suspicious activity, take the necessary action immediately. Since prevention is always better than finding solutions to existing problems, ensure your account is secure. This way you will reduce the chances of becoming a victim of identity fraud.