If you become an identity theft victim, laws in the U.S. will protect you from being held financially liable. While that is comforting to know, there are still concerns over how your credit score will change after your identity gets stolen.
So, here’s the rundown…
How Credit Scores Work
First, to know the implications identity theft can have on your credit score you must understand how your rating gets calculated.
Most lenders follow the latest FICO score, which is available in many different forms. There are scores specific to loan types, such as the FICO Auto Score. Regardless, the main credit rating that gets used incorporates the following calculation algorithm:
- 35% – Your previous payments
- 30% – Your debt total
- 15% – Length of Credit History
- 10% – New Credit Inquiries
- 10% – Types of Accounts
By dissecting this credit rating formula, you will have a better idea on how an identity theft crisis could impact your FICO score. Some implications are obvious, while others require a bit more analysis to understand. The identity thieve’s actions can cause effects on your credit progression as time passes. Declaring yourself as an identity theft victim will not erase this damage; your creditors cannot give a more appropriate calculation, so faulted FICO scores can occur as a result of an identity crime.
Now, let’s look at each calculation factor and see how an identity theft situation could cause an impact.
Identity Theft and Your Previous Payments (35%)
Becoming an identity theft victim will position your credit score failure in more ways than one. The most obvious, though often reversible, variable is your payment history. Your identity captor has little incentive to pay on any of your debt. As your debt total grows, so do your minimum payments; if you leave your debt unpaid, your FICO score could see a drop every month until the debt gets written off. From there, the damage will be the most severe as having a debt charged off is a big negative.
Further, identity thieves try to hide their tracks by sending credit card statements to addresses that they control. This could leave the victim out of the loop for at least a couple months; once the con is detected, the FICO score could have dropped by as much as 100 points. If there are new accounts open, these are even harder to detect and there’s a good chance the victim’s score will have crashed by the time they are discovered.
Identity Theft and Your Debt Total (30%)
Identity theft can hamper your debt total variable in at least two ways.
First, an identity thief taking on extra credit will push your available credit up a lot. This might not drop your score, but it will reduce the amount of credit you can obtain in the future. For example, someone with $50,000 in credit card debt and a new car to pay off might struggle with financing a home due to their high debt load.
Second, once the thief maxes out your cards and cashes out for a profit, your debt-to-credit ratio will get wrecked. It will appear as if you borrow every dollar you can, and that you cannot afford to pay it back. No lenders will want to deal with you, and your score will see a gradual drop for a very long time. The debt-to-credit ratio is a significant number, which directly dictates how much can be borrowed by even the most responsible borrowers.
If the identity thief drains your bank account, it’s possible your real debts will not get paid. These payment delinquencies will trigger a small drop in your credit score. After the first missed payment, you will likely have reported the identity theft to the FTC and your local authorities. Still, your FICO score will see a decrease as a result of the missed payment; if it’s your first delinquency, your excellent credit status will drop.
Identity Theft and Length of Credit History (15%)
After an identity theft situation, some long-standing credit accounts could get shut down. This might happen after you are inactive for years, then have to deal with the creditor again. You might want to press to keep all your established credit lines active as they contribute towards your average credit history length. It’s also wise to force closure and removal of all new, forged accounts from your credit file.
Your score will see an immediate drop from the average age getting dragged down, but clearing these errors should cause it to pop back up. This variable can only be a major negative if the criminal had an account in your name for a long time. For example, a synthetic identity theft crime often involves the fabrication of borrowing history for months or years; the victim could have the allusion of excellent credit, up till their appropriate score gets calculated.
Identity Theft and New Credit Inquiries (10%)
An identity thief will attempt to open new credit lines in your name. Depending on their approach, it’s possible that a substantial amount of new credit inquiries will take place. This could also take place over the course of many months or years. The consistent attempt to open new credit lines will demolish your credit, and failing to catch the large influx of inquiries could make the damage irreversible.
Identity Theft and Types of Accounts (10%)
The types of borrowing accounts listed on your credit file make up for 10% of your credit score calculation. The goal is to have a diverse selection of credit lines, including both installment and revolving debts. The amount of each account type and overall diversity could vary as an identity thief opens new credit lines. But, this variable is the least affected by an identity crime as the new accounts will only cause a minimal shift in your FICO score.
Should Identity Theft Concern You?
It’s important to not underestimate the risks involved with identity theft. This is a type of fraud that affects many millions of people in our country alone. Children, teachers, and even deceased war veterans are getting victimized by fraudsters looking to turn a sneaky profit. It’s something that has only gotten worse over time, as technology has opened the doors to many large-scale identity theft scenarios.
As such, identity theft is a general concern for everyone. This means it should be something that every quality borrower worries about, because it can affect them. Even though the victim is not financially liable in most circumstances, the damage to their credit score could be there to stay. So, you should be doing all you can to keep your identity safe as doing so safeguards your credit-building efforts from sudden failure.
How Can You Prevent Identity Theft?
There is no bulletproof method that people use to prevent identity theft.
Most follow at least a few safety standards, such as keeping their Social Security Number card hidden and not paying with credit cards while vacationing out of country. You can treat these tips as ‘rule of thumb’ advice, because it’s something you should always follow. If you want to understand both the fundamentals and the more advanced protection techniques, take a look at our detailed list of 100 identity theft prevention tips.
If you are reading this, it’s fair to assume you also pay attention to your credit score fluctuations. You might even have a credit monitoring service that you use, and pay for every month.
I’m an Identity Theft Victim … What Now?
After finding out you were victimized by an identity thief, there are a lot of things you need to do. Some steps include reporting to the FTC, your local authorities, and informing each of the credit report bureaus. These agencies will then put a 90-day fraud alert on your account, making it essential for lenders to contact you to verify account changes, credit applications, and etc.
Next, you need to set up some type of credit monitoring or identity theft protection (as advised above) to keep track of your identity. Since there’s a thief that has information about you, likely your Social Security Number, it’s imperative to watch for any future fraud attempts. These monitoring services will pick up on such activity right away, and the credit bureaus will run an extended 6-year fraud alert to further protect you.
After all the security aspects are handled, you can start working on your credit score again. This is where you have to ‘pick up the pieces’ and figure out how to use the hand you are dealt.
Fixing Damage to Your Credit Score
You need to reverse as much of the damage as possible. That starts with getting fraudulent accounts closed in full. FICO should then remove any point drops caused by the new credit inquiry and subsequent account creation, charge off, and so on. This should bring your credit rating back to close to what it was before the identity thieve’s actions started influencing your calculation.
It’s still possible the identity thief had fraudulent activity in your other borrowing accounts. How you decide to handle these accounts will have a big impact on how your score gets calculated after the fact.
For example, having a 10-year old credit card charged off could drop your credit score a lot. In that scenario, you would want to keep your credit card active given the lengthy history as it has a significant influence on your FICO score. Yet, if the damage took place months ago and you hold financial liability you might be more inclined to give up on the account. Just understand that by doing so, your credit rating will have a sizable drop that will not be easy to recover from.
Building Your Credit Score Up
Your credit rating will have a fair bit of damage, whether it’s seen right away or not. This is because ‘excellent’ credit scores are only achieved by managing to have little-to-no imperfections on your credit file. If it’s a simple identity theft case, and you caught the fraud right away, you should be back on track to credit-building success after six months.
Meanwhile, you might want to re-approach your credit-building if you were the victim of a severe identity theft case. This would involve seeing how the identity theft affected your credit report, and looking for ways to mitigate the damage. You might be able to dispute some credit report entries as errors, while others could have to stay there until they age off. Regardless, reported negatives will have less of an impact on your credit score over time.
How a Damaged Credit Score Affects You
It might seem easy to shrug your shoulders and ignore the advice you are given here. Yet, by doing so you could be putting yourself in a horrible position. After all, your credit rating can either cost you or save you a lot of money so having a quality credit score is important.
If you become an identity theft victim, your damaged credit score could cause any of the problems listed below.
- You are no longer able to qualify for the same borrowing amount, interest rate, and terms that you got from lenders when your score was higher,
- You have to spend 100’s of hours trying to restore your identity, unless you paid for identity theft protection,
- Your insurance premiums could see a rise, though you can request an ‘extraordinary life exception’, and,
- You find yourself having to wait an extra few years to buy a home, and possibly at much higher interest premiums.
Seriously, if for nothing else your credit score should be seen as a speculative investment. You will need to borrow money for something at some point, whether it’s through a credit card or mortgage broker. Getting optimal borrowing rates will put you in the best financial position at the time. For instance, you could pay around $120 less per month on a $200,000 30-year fixed rate mortgage if your credit score nets you 4% instead of 5% interest premiums.
Conclusion: You Must Protect Your Identity NOW!
You take enough unnoticed gambles in your life. In fact, your life alone is a gamble — did you know your odds of dying in a car crash are greater than 1 in 100? So, when you see 10’s of millions of Americans getting victimized each and every year — it should serve as an eye opener!
Even though you cannot guarantee that no identity thief will ever defraud you, it’s possible to lower your exposure to identity theft risks. We detailed that earlier; by following sound identity theft prevention advice and investing in quality identity theft protection, you can maximize your identity security.
Regardless, make sure you know What To Do if you become a victim!