What Is Credit Fraud?

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Credit fraud is the criminal use of someone else's personal credentials, as well as their credit standing, to borrow money or use credit cards to purchase goods or services with no intention of repaying the debt.

Credit card fraud is the most prevalent type of identity theft. According to the Federal Trade Commission, more than 270,000 Americans reported new or existing account fraud in 2019.

The person whose credit is misappropriated typically ends up with unpaid debt in their name. While this can eventually be sorted out, the process takes time and effort, and may cause credit scores to suffer temporarily and hamper a person's ability to obtain new credit for a time.

Types of Credit Fraud

There are at least 20 distinct types of credit fraud. All are forms of identity theft, distinguished by some combination of:

  • The type of personal information used to assume the victim's identity. Stolen credit cards, account numbers, usernames and passwords, and Social Security numbers are among the many pieces of personal information that can be used to commit credit fraud.
  • The means by which personal information is stolen. Criminals can gain possession of your personal information in many ways, including phishing scams conducted by phone, email or social media; skimming credit card data via bogus card readers; copying passwords, PIN codes and other information by looking over your shoulder; stealing your driver's license (which can be used to request birth certificates and other info), mail or credit cards; and purchasing lists of information leaked in data breaches.
  • The type of credit obtained through fraud. Identity thieves use a variety of techniques to hijack credit, including opening new loans or credit card accounts in your name; taking control of existing credit card (or bank) accounts by changing mailing addresses and passwords; going on spending sprees with stolen credit cards or account numbers; opening one or more accounts in the names of your minor children who otherwise wouldn't have personal credit reports; and associating your name with another consumer's credit data to create a fictitious "hybrid" account they control.

How Does Credit Fraud Happen?

Credit fraud occurs when thieves use personal information belonging to one or more consumers to open loans or credit card accounts, to buy goods or services, or to secure cash advances—and then disappear without ever paying a dime. It can also happen when fraudsters exploit existing accounts by gaining access to credit card information and using it to make purchases without the victim's knowledge or consent.

According to the most recent available data from credit card industry publication The Nilson Report, losses from credit fraud were nearly $28 billion in 2018, with U.S. losses totaling nearly $9.5 billion.

Consumers, businesses and credit users in general suffer as consumer information is compromised for criminal gain. Additionally, lenders may charge higher fees and interest rates to cover the costs of fraud-prevention and fraud management programs.

How to Avoid Credit Fraud

The pervasiveness of credit fraud and the ever-evolving methods criminals use to steal personal data make it critical to safeguard your credit information, including credit card numbers, account usernames and passwords, and personal credentials such as your Social Security number.

Measures you can take to safeguard your info include:

  • Staying skeptical: Be wary anytime you're asked to supply any sensitive information via email, phone call, text or instant message. The communication may appear to come from a trusted source, but the institutions you deal with regularly—including banks and credit unions, credit card issuers, the IRS and the Social Security Administration—already know your account numbers; they wouldn't be asking you for them, even if they were trying to verify your identity. If in doubt, contact the organization in question yourself by phone or their online accounts to verify the communication is legitimate.
  • Browsing securely: When shopping online, make sure your browser connection to the merchant is secure and encrypted (look for an "https" at the beginning of the web address), and avoid using open public Wi-Fi networks (those without passwords), which thieves can easily monitor and troll for important data.
  • Protecting yourself from prying eyes: Take care to shield the keypad when you enter your account PIN, and when possible, use credit cards with data chips, which are more difficult to skim than swipe-only cards.
  • Keeping your voice down: When in public, avoid speaking account numbers and your Social Security number out loud. For instance, if you decide to pay your bills by phone while hanging out in public, use your phone's keypad, rather than voice prompts, to enter account numbers, PINs and other information. If you're dealing with someone in person, consider asking if there's a way you could enter the information into their system yourself, without speaking it aloud.

Guarding your data is crucial, but because criminals can sometimes get personal data via large-scale data breaches that affect thousands of consumers at once, it's also important to continually watch for signs of unauthorized activity on your credit and other financial accounts:

  • Check your credit card statements carefully each month. Keep tabs on all your accounts, even the ones you don't use regularly. Make sure you recognize all transactions, and if you're uncertain about any, call the card issuer to learn more. Lenders also have a stake in avoiding credit fraud, and can assist in checking out any suspicious activity on your accounts.
  • Review your credit reports for unfamiliar credit checks and new accounts. If you see any entries that you don't understand, use the contact information included for each creditor to inquire about what's going on. If accounts you didn't authorize have been set up in your name, the creditors will begin investigating. You should also file a report with appropriate law enforcement organizations and take steps to secure your credit files (see below).
  • Consider using a credit monitoring service. Monitoring services can notify you when a lender requests a copy of your credit report or credit score, or when new loan or credit card accounts are added to your credit file. Experian offers a free service that monitors your Experian credit file, and subscription identity protection services that monitor your credit files at all three national credit bureaus and add a variety of other fraud-detection benefits.

What to Do if You Believe You're a Credit Fraud Victim

If you believe unauthorized credit activity has been committed in your name (or in the names of your minor children), it's important to report the crime to appropriate authorities as quickly as you can. Do the following as soon as possible:

  • Contact the lender in question immediately to get a better handle on the situation. If fraudulent activity does appear to have occurred, advise the lender to begin an investigation, and cooperate with them as needed.
  • Report the suspected crime to law enforcement immediately so they can begin investigating. The U.S. Federal Trade Commission's IdentityTheft.gov website is a great place to start; it can help you find the law enforcement organizations with jurisdiction over different types of credit fraud and other related financial crimes.
  • Consider taking action to secure your credit reports at the three national credit bureaus (Experian, TransUnion and Equifax), to make it more difficult for fraudsters to apply for and secure credit in your name:
    • Adding a fraud alert to your credit reports instructs creditors to confirm your identity before processing credit applications received in your name.
    • Applying a security freeze to your credit file limits access to your credit information.

Credit alerts and security freezes have different advantages and drawbacks, so compare them before deciding which is better for you.

Credit fraud is an unfortunate occurrence that affects hundreds of thousands of people every year and causes consumers and businesses alike to lose money. Credit fraud is a persistent nuisance that's unlikely to disappear anytime soon, but safeguarding personal data, staying alert to the possibility of unauthorized credit activity, and reporting suspicious activity as soon as you notice it can help you avoid major grief at the hands of credit fraudsters.