Becoming an identity theft victim is distressing and can lead to financial troubles. According to the 2021 Consumer Aftermath report by the Identity Theft Resource Center (ITRC), many victims faced financial hardship, including loan and housing rejections and bill collector harassment. Rebuilding your credit is essential, as it can take months for fraudulent charges to vanish from your record and it is important to learn how to rebuild your credit for the short and long term.
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What Makes Up Your Credit Score
Your credit score consists of five key factors: payment history, outstanding debt, credit history length, new credit accounts, and credit mix (types of credit). Payment history is the most crucial, making up 35% of your score, reflecting your bill payment consistency. Next, the amount you owe relative to your credit limit is 30% of your score.
Credit history length (15%) favors longer records. New credit (10%) can impact your score negatively if accumulated quickly. Lastly, your credit mix (10%) demonstrates your ability to handle various types of credit.
How Identity Theft Impacts Your Credit Score
Identity theft can severely damage your credit score due to the tactics used by thieves. They often open multiple new credit accounts, max them out, and then neglect payments, leading to collection calls. This immediately affects the most significant aspects of your credit score: amounts owed and payment history. Your available credit appears fully used, and you miss payments.
Additionally, if the thief drains your savings, it becomes challenging to manage legitimate bills. The accumulation of new credit works against you, making you seem irresponsible or desperate. While your credit mix may diversify, it can’t offset the negative impact. Although the overall credit history length remains, the length of your good credit history shrinks.
What to Do If You’ve Fallen Victim to Identity Theft
Whether you’ve noticed early signs or been caught off guard by identity theft, take these steps to address it. Begin by filing an official complaint with the FTC at IdentityTheft.gov, which provides a case number for credit rebuilding and helps create a recovery plan. Focus on resolving fraudulent accounts and entries.
- Report identity theft to TransUnion, Equifax, or Experian (they’ll notify the others).
- Obtain credit reports from all three agencies.
- Contact the National Consumer Telecom & Utilities Exchange.
- Place fraud alerts and credit freezes at each agency.
- Notify creditors of fraudulent accounts, some may require a police report.
- Reach out to institutions and merchants for compromised accounts.
- Challenge fraudulent charges with collection agencies.
- Keep detailed records of all actions taken for reference.
7 Essential Steps for Credit Rebuilding
Recovering from identity theft is a complex process, and while you’re navigating it, you’ll likely need to continue using credit for your everyday expenses. To do this effectively, you’ll need to rebuild your credit, which follows a similar process to recovering from a financial setback. Here’s a step-by-step guide to help you through this challenging journey:
- Keep Paying Legitimate Accounts: For accounts with fixed payments, continue making your scheduled payments. Even if you’re disputing charges or loans related to identity theft, ensure you pay the correct amount for legitimate charges. This will help maintain a positive record of on-time payments once the fraudulent activity is resolved.
- Set Up Automatic Payments: If you’ve had a history of missing payments due to forgetfulness or disorganization, it’s crucial to change this behavior. Setting up automatic payments is a simple and effective way to ensure you don’t miss any payments.
- Pay Down Existing Credit: If you have the means, consider paying down some of your existing credit balances. This will lower your overall credit utilization, especially while you’re waiting for the fraudulent credit to be removed from your credit report.
- Keep Your Oldest Accounts Open: Despite the temptation to close some accounts, especially those that were maxed out by identity thieves, keep your oldest accounts open. The length of your credit history contributes 15% to your credit score, so maintaining these older accounts is beneficial.
- Monitor Your Credit Reports: As you successfully challenge fraudulent accounts or purchases with creditors and merchants, make sure these entries are removed from your credit report. Regular monitoring ensures that derogatory information is removed promptly, positively impacting your credit score. You might also uncover honest errors that need correction.
- Be Wary of ‘Rebuild Your Credit’ Offers: When searching for ways to rebuild your credit online, you’ll come across many offers, often tied to new credit accounts. While this can be a helpful strategy, it’s important to be cautious. If identity thieves opened multiple new credit accounts in your name, applying for more credit could potentially worsen the situation. However, new credit only contributes 10% to your FICO score, so the risk might be worth it if you genuinely need new credit.
- Consider a Secured Credit Card: If you decide to pursue new credit, one option is to inquire with your current bank or credit card provider about a secured credit card. With a secured card, you’ll need to place a deposit equal to your credit limit as collateral. By using this card responsibly and making on-time payments, you can demonstrate creditworthiness. As these positive payment habits accumulate on your credit report, your credit score will gradually improve. Additionally, after a specified period of responsible use, you’ll receive your deposit back.
In conclusion, recovering from identity theft is undeniably challenging, but it’s essential to rebuild your credit and regain financial stability. By diligently following these steps and staying proactive, you can minimize the impact of fraudulent activity on your credit history. Remember that patience and persistence are key as you work towards restoring your credit and securing a brighter financial future.