By John Ulzheimer, credit expert for CreditSesame.com
On January 12th the White House issued a press release commending the banks and credit unions that are giving away free FICO and VantageScore credit scores to their customers. Oddly enough, though, the release suggests that "one of the best early indicators of identity theft" are these free credit scores. And while getting access to your credit scores is great, they're terrible and ineffective at alerting consumers that they may have been a victim of identity theft.
The latest lenders that are giving away free credit scores are Citibank, Chase, Ally Bank, USAA, and State Employees Credit Union. Citi, Chase, Ally and State Employees are giving away FICO scores while USAA is giving away VantageScore credit scores. Don't get me wrong, getting access to your credit scores at no cost is great. But, to suggest that getting monthly access to your credit scores will "help you spot identity theft" underscores a lack of understanding about credit scores.
First, the credit scores that are being given away are general use FICO and VantageScore risk scores. These are the scores used by lenders to approve and deny credit applications and to otherwise assess the risk of a lender doing business with you. They are not, and have never been, designed to be a fraud detection tool.
When someone applies for credit in your name, there are a variety of changes that can occur on your credit reports. The following is a list of those credit report changes, and any impact they would have on your credit scores. Remember, the White House would have you believe seeing your credit scores for free every month would somehow alert you that you've been the victim of identity theft.
A new fraudulent address on your credit report. Fraudsters often apply for credit using a false mailing address. When this happens it's not uncommon for that false address to appear on your credit reports. The problem is credit-scoring models do not consider address information, so there would be no change to your score from the prior month because of a new fraudulent address.
A new fraudulent credit inquiry on a credit report not used by the banks giving away your credit scores. When a fraudster applies for credit in your name, the lender pulls your credit report from one of the three credit reporting agencies. That will cause a fraudulent credit inquiry to appear on one of your three credit reports, not all three of your credit reports. Let's say the fraudster applies, in your name, with a bank that pulls your Equifax credit report. That will result in a fraudulent inquiry to appear only on your Equifax credit report.
If the bank that is giving you a free credit score uses Experian or TransUnion credit reports as the source of the free scores (that's how it works), then the score they give you will not be influenced in any way by the fraudulent credit inquiry. So, there's no way you'll be alerted to the possibility of identity theft because your score wouldn't change as a result of the fraudulent inquiry.
A new fraudulent inquiry on a credit report that is used by the banks giving away your credit scores. Even if the bank that's giving you free credit scores uses the same credit reporting agency where the lender pulled your report under false pretenses, the likelihood that the change in scores will alert you to identity theft is none. Inquires have either no impact on your credit score or, at worst, minimal impact. So, if last month USAA gave you a VantageScore of 790 and this month they gave you a VantageScore of 788, would you really think you had been the victim of identity theft? Of course not.
A newly opened fraudulent account appearing on all three credit reports. If a fraudster is successful opening an account in your name, the account will appear on your credit reports, likely all three of them, within 30 days. This, like inquiries, will have a minimal impact to your credit score. So, if last month Discover gave you an 820 FICO score and this month they gave you an 813 FICO score, would you really think you had been the victim of identity theft? Of course not.
A new collection, late payment or otherwise derogatory account appears on all three of your credit reports due to fraudulent activity. Ok, now we're talking. New derogatory information appearing on your credit reports can turn a good credit score into a bad credit score overnight. If last month USAA gave you a VantageScore of 775 and this month they gave you a score of 559, would you think you had been the victim of identity theft? Maybe, maybe not.
I think most consumers would freak out if they saw their scores drop that much in one month and would definitely investigate why it dropped and, assuming they pulled their credit reports to see the actual data, would realize that there is information on their reports that doesn't belong to them. The problem is that most lenders don't start reporting accounts as being delinquent for at least 30 days past the due date. So, in the best-case scenario, the soonest you'd see your much lower score would be 60 days after the fraudulent account was opened, which is made up of the 30 days of your billing cycle and then the 30 days past the due date. And that's assuming you are diligent about logging into your credit card account monthly to check your new credit score update.
Most creditors don't send accounts to collection agencies for months, so in the worst case scenario you wouldn't see a lower credit score for six months, or more. Point being, waiting 60+ days and possibly several months to see a much lower credit score, and somehow because of that realize that your identity has been stolen is certainly not an "effective" use of credit scores. I'd rather call that an ineffective use of credit scores.
The most effective tool to determine if you've been the victim of identity theft is credit monitoring, like the free service provided at CreditSesame.com. Credit monitoring passively tracks your credit reports 24/7/365 for all of the above referenced list of suspicious credit report changes. If any of those items occur, you're notified immediately that you may be the victim of fraud. They are designed for one purpose and one purpose only, which is to protect you from fraudulent access into your credit reports.