Personal Finance

How identity theft affects your credit score

Identity theft can unfairly hamper its victims' ability to get credit and loans - on top of other hardships.

The actions of fraudsters can affect your credit score in myriad ways. The damage can be temporarily devastating, but you can avoid serious long-term impact by quickly contacting your card issuers and filing disputes with the major credit bureaus.

Four years ago, Bradley Shaw of Texas saw his credit score fall from 780 to below 700 after his identity was stolen.

"I spent many hours online filing disputes with all three credit reporting agencies," Shaw said. "In all, I spent more than 50 hours over six months in an effort to repair the damage."

Shaw was fortunate to have a stellar credit score prior to the theft. But for many consumers, losing more than 80 points could prevent them from getting credit cards and loans with favorable terms, or any credit at all.

Here's how identity theft can affect your credit score, based on some of FICO's key scoring components.

Payment history: The thief isn't 'good for it'

If a thief opens a credit card or takes out a loan using your personal information, chances are he's never going to pay the balance. Credit card issuers typically report late payments to credit bureaus once they're 60 days past due. Payment history accounts for 35 percent of your credit score, and a single missed payment can cause it to drop by as many as 110 points.

It takes time to repair credit score damage from fraud, even after you've reported it to the card issuers and closed the cards.

"Building credit takes time no matter the circumstances, but the amount of time it takes to do so varies," said Heather Battison, vice president of TransUnion. "That's also true for repairing credit after identity theft. Each situation is different. No matter what, it's important to respond quickly if you believe your identity has been compromised."

"Building credit takes time, no matter the circumstances, but the amount of time it takes to do so varies. That's also true for repairing credit after identity theft."

Battison said TransUnion typically resolves disputes within 45 days, if the consumer provides proper documentation. That can include a police report and a letter from the creditor stating how the account should be corrected, among other documents.

Failure to act will worsen the damage. If a thief rings up a high balance in your name and doesn't pay, the unpaid debt will eventually be turned over to a collection agency. That's another derogatory credit report item that can cost your credit score over 100 points. If that's not enough, lenders can also pursue legal action against you for unpaid debts.

"If someone is unaware of this activity and these debts go unpaid - which they invariably do - the lender might sue the person for the balance they 'owe,'" Battison said. "People can fight these types of lawsuits and they may win if they can establish that they're a victim of identity theft, but the battle will run up legal costs, not to mention the time it takes to tend to the matter."

Battison also noted that a thief can use your personal information to drain your checking account, which can then result in missed payments on your legitimate credit accounts.

Credit utilization: Take it to the limit

If a thief applies for a credit card in your name and gets it, the odds of the card then being maxed out are high. FICO estimates that charging up to your card's limit can lower your score by as many as 45 points.

Identity theft expert Rob Douglas said thieves tend to ring up high balances on fraudulent credit cards right away because they know the fraud will eventually be detected.

"The odds are that the card's going to get closed down before they've done much, so they want to maximize it as quickly as possible," Douglas said.

Length of credit history: Card binge shortens your 'life span'

Let's say a thief obtains your personal information and applies for five different credit cards in a span of a few weeks or months. If all those applications are approved, it significantly decreases the length of your credit history , which accounts for 15 percent of your credit score.

It may not be such a problem if you have several card or loan accounts that are 8 to 10 years old on average. But suppose your credit history consists of one card that's 5 years old and another that's 2 years old. If five new cards are added to your account at once, your average age of all accounts drops from 3.5 years to 1 year.

Your score should return to normal in a short amount of time if you report the cards as fraudulent and file disputes with credit bureaus right away.

Douglas said sophisticated credit card fraud rings usually don't open multiple credit lines in one victim's name because it can arouse suspicion. But there are exceptions. In June 2017, a Washington woman was arrested for an identity theft spree that spanned two counties. One of the woman's victims said in court that nine credit cards had been opened in his name and that his "perfect" credit score was ruined.

New credit: Multiple inquiries add up

A thief can only obtain so many credit accounts in your name - eventually, issuers may balk at the sight of so many new accounts and start denying further applications. But that may not stop the thief from trying, and every credit application generates a hard inquiry on your credit report.

Hard inquiries typically ding your credit score by about five points, but an avalanche of applications can send your score into a freefall. Hard inquiries not related to fraud typically stay on your credit report for two years, but fraudulent ones can be removed sooner by filing disputes with the credit bureaus, Battison said.

It's not the worst thing that can happen, but …

Credit score damage isn't the worst possible outcome of identity theft. As noted by the Federal Trade Commission , a thief can file a tax return in your name and take your refund or even give your name to the police while being arrested. But a credit score collapse - whatever the cause - can hurt your ability to borrow in the short term. And it takes time and effort to reverse the impact of identity theft.

"Identity theft can have a lasting effect if it's not addressed quickly and properly," Battison said. "That's why we always recommend customers take preventive measures to protect their credit."

By taking the right steps to protect yourself - by checking your credit report regularly at CreditCards.com and securing your personal information, among others - you can focus on maintaining and building excellent credit without fear of sabotage.

See related:Bluesnarfing is newest card fraud at gas pumps and ATMs , Suspect card fraud? How to file a claim

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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