Writer: Eric Bank
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
Anyone who has gone through identity theft knows it can be a nightmare — you lose money and credit score. But the Philadelphia Fed’s new study shows that people who file extended fraud alerts often wind up in better shape.
The study examined 50,000 Americans who filed extended fraud alerts from 2008 to 2013. Alerts prompt lenders to check an applicant’s ID before approving a new loan. These alerts remain effective for seven years. They initiate a clean-up campaign that includes weeding out errors and removing fake accounts.
You may be able to recover faster if you file an extended fraud alert. Filers are typically homeowners with significant resources. But the new tools can help anyone, especially folks with bad credit.
Many filers saw an initial score drop of two to three points. But scores soon recover and end up higher by about a dozen points. The improvements last for about five years. Moreover, approximately 11% of filers climbed into prime score territory. That helps them get loans easier and cheaper.
Filing extended fraud alerts has helped many people improve their credit scores by 11 or 12 points on average.
Experian warns customers that adding an extended fraud alert “could lead to a delay when you apply for a new credit card or loan because you’ll need to wait for the creditor to verify your identity or contact you,” according to a company blog post.
Cleaning Up — and Leveling Up
Consumers who file the alert often monitor the credit closer. Filers are likely to check accounts and dispute invalid charges. They also tend to contact authorities — police and the Federal Trade Commission — when necessary. In other words, victims change their behavior:
- Fewer missed payments: People started making payments on time — improving payment history and lowering delinquency rates.
- Fewer collections: Collections dropped sharply. Evidently, filers communicated better with lenders.
- Cleaner credit files: Regular monitoring helps filers maintain their balances and avoid late fees.
- Better long-term results: Filers reduced major derogatory events, such as charge-offs, collections, and foreclosures, by four to seven percentage points. More filers had credit card balances in good standing.
- Accurate reports: Fewer wrong data and fake cards.
After filing extended alerts, most people continue to use their credit. They manage car loans and mortgages for a minimum of five years. Lenders specializing in subprime loans can spot improvement quickly.
The study also showed that many filers got new auto loans. Average auto loan balances went up by as much as $500. A significant number also got new mortgages, raising average mortgage loan balances by as much as $12,000.
From Victim to Vigilant
People who file extended alerts are more in control. It forces lenders to take greater care, to the chagrin of scammers. It works, but it isn’t easy. Federal rules (i.e., FCRA and FACTA) apply to extended alerts. Filers can renew the alerts after seven years.
They can also specify how lenders can communicate with them when checking identity.
Subprime lenders benefit from reduced fraud when victims file extended alerts. The alerts also encourage consumers to adopt better credit behavior. Eagle-eyed borrowers who monitor their credit are less likely to default and faster to recover.
Of course, no one is promising that fraud will vanish. But the Fed study holds out hope for faster recovery. Victims often enjoy a better credit standing by taking the right steps.
