Credit Scores and Identity Theft: How Each Impacts the Other

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Your credit score is the one constant used to determine whether you’re approved for a loan – and to set interest and premium rates for credit cards, homeowners and auto insurance, even deposits for new utility service. But that three-digit score itself may frequently change.

It’s typical for your score to fluctuate by a few points, based on spending and payment at any given time, information in your credit report (which is constantly being updated), even the passage of time.

But a larger, unexpected drop can signal identity theft – and identity theft can certainly devastate a score, at least in the short term. Although there are many credit scoring providers, each using a slightly different formula (just as your credit report may vary depending on the credit reporting bureau), here are some general guidelines on how ID theft can impact your credit score:

  • New credit inquiries. Each time new credit is applied for in your name – by you or an identity thief – lenders check your credit report. One additional credit inquiry should have little impact – typically, less than 5 points (but more for those with few accounts or a short credit history), reports FICO, whose scores are used by most lenders. The drop deepens with more inquiries that result when ID thieves apply for multiple account in victims’ names, as they often do.
  • New accounts. These represent only 10 percent of a FICO score, so the problem isn’t with new credit and loans issued in your name – again, expect a drop of only a few points, and likely more for credit-seeking newbies. But a bigger hit occurs when many new accounts are issued over a short period (say, three new credit cards within one month) to decrease the length of your credit history, which represents about 15 percent of your score. Even worse is when those accounts become delinquent because the ID thief isn’t paying the bills.
  • Late payments. The two biggest factors in scoring: Payment history typically accounts for about 35 percent, and amount(s) owed are another 30 percent. So when an ID thief opens one or more accounts in your name, then racks up charges but doesn’t pay, your score will suffer. Just one, even small, late payment can drop a credit score roughly 100 points, taking up to three years to rebound. Further black marks occur when unpaid bills are turned over to a collection agency.
  • Higher balances on existing accounts. If a thief gets access to an existing account – say, maxes out your credit card – you won’t be liable for fraudulent charges, but your score could suffer. That change in your so-called credit utilization (the difference between your existing balance and the spending limit) could drop your credit score as much as 45 points. The good news: When fraudulent charges are successfully disputed, the ding is erased.

So along with getting those free credit reports that detail your credit history at annualcreditreport.com, it’s wise to keep tabs on your credit score – even if you have no plans to apply for new loans or plastic. (Credit scores are not included in the free reports, which are available from each of the three major reporting agencies once per 12-month period.)

Banks and credit card companies may provide customers with free scores on request, often each month. You can also try websites such as creditkarma.com, mint.com, creditsesame.com and quizzle.com; the trade-off is that you’ll receive promotional emails for products such as credit cards and loans that generate those websites a revenue share for customer enrollment. (So don’t use your primary email account unless you want a lot of spam.) But beware of “free” credit score scams. If a huge drop in your score raises your fraud antenna or you discover bogus accounts in your name, follow this recovery plan from the Federal Trade Commission.

For information about other scams, sign up for the Fraud Watch Network. You’ll receive free email alerts with tips and resources to help you spot and avoid identity theft and fraud, and gain access to a network of experts, law enforcement and people in your community who will keep you up to date on the latest scams in your area.

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