How Can Identity Theft Affect Your FICO Scores?
, by Rob Kaufman
Like getting your identity stolen isn't bad enough. When a criminal steals your identity, he or she can also steal your good credit score.
Your FICO Score is calculated using five factors from your credit score:
Payment History: Have you paid your past credit accounts on time?
Amounts Owed: How much money do you currently owe to lenders and creditors?
Length of Credit History: How long have you had established credit accounts?
Credit Mix: What's your mix of credit cards, retail accounts, installment loans, mortgage loans and finance company accounts?
New Credit: How many credit accounts have you recently opened?
When an identity thief steals your identity, four of these five factors are at risk. If the thief takes actions that affect any of the four factors, your credit score could be in peril. Here's why:
If an identity thief opens an account (i.e. credit card) or takes out a loan in your name, the balance on the account or loan is not going to be paid. Since credit card companies typically report late payments to the credit bureaus after they're sixty days past due, your payment history will start to suffer. Payment history accounts for 35% of your credit score so one missed payment could start bringing your credit score down a lot faster than you might think.
Chances are, if a criminal gets a credit card using your identity, they'll max out the card. This will increase your "credit utilization", which is the ratio of your outstanding credit card balances to your credit card limits. Since Amounts Owed accounts for 30% of your FICO® Scores, a high credit utilization (over 30%) can negatively affect your score by as much as 45 points.
Length of Credit History
In general, a longer credit history (how long you've been using credit) should help increase your FICO Scores. When a criminal takes your personal information and gets approved for a number of cards or loans in a short period of time, the length of your credit history will significantly decrease. This factor accounts for 15% of your credit score which means it could take a hit if too many accounts are opened too quickly.
There's a limit to how many credit cards or loans a thief can obtain in your name. However, every time he or she applies for credit, you receive a hard inquiry on your credit report. Each inquiry can lower your credit score by about five points and all inquiries remain on your report for two years. New credit accounts for 10% of your credit score, so multiple hard inquiries can hit your score hard unless you can get them removed by filing disputes with the credit bureaus.
Protecting Your Identity and Your FICO Scores
Now that you know what can happen to your credit score if an identity thief uses your name to gain credit, here are 5 top ways to help protect yourself from having any of these things occur:
Keep an eye on all your financial accounts . Pay close attention to potential errors or suspicious activity in your bank and credit card accounts.
Use strong passwords. Avoid using personal information as passwords (i.e. birthdate) and consider using a password manager that generates, stores and inputs complex and secure passwords for you. It'll help keep hackers out of your online accounts and out of your personal business.
Think about a credit monitoring service. Credit monitoring helps track your credit reports on a consistent basis and will notify you of changes to specific credit bureau reports. This is another way to stay aware of suspicious activity.
Place a fraud alert on your credit reports. If you believe you might be a victim of identity theft, place a fraud alert (it's free) on your credit reports so credit card issuers and other lenders will be made aware you're a victim of identity theft. This should stop them from opening accounts you didn't apply for yourself.
Consider a credit freeze. A credit freeze locks your credit report so lenders can't pull them. This prevents a new account from being opened with your identity.