- Key insight: Identity theft victims who file extended fraud alerts often experience significant and persistent improvements in their credit profiles, becoming more creditworthy.
- What's at stake: U.S. banks and credit unions that understand the behavior of identity theft victims can land better credit lines.
- Supporting data: Extended alert filers saw their credit scores increase by an average of 11 points, lasting up to five years.
Overview bullets generated by AI with editorial review
A new working paper from the Federal Reserve Bank of Philadelphia finds that certain consumers who experience severe identity theft subsequently experience significant and persistent improvements in their credit profiles, often becoming more creditworthy than before the fraud occurred.
The research holds particular relevance for U.S. banks and credit unions, as it illustrates that identity theft victims who leverage so-called extended fraud alerts, a specialized consumer protection product, significantly and persistently reduce their credit risk and engage in more secured borrowing.
The working paper,
What is an extended fraud alert?
An extended fraud alert is a notification that, at the consumer's request, appears on the consumer's credit reports for seven years after a fraud event.
The alert requires lenders to take additional steps to verify the consumer's identity before they grant a request to open a new credit account, increase an existing credit line or issue an additional card.
The consumer must specify a reasonable contact method, such as a telephone number, in the alert documentation, and creditors must use this method to verify the consumer's ID. Placing the alert is free, and consumers can renew it after the initial seven-year period.
Only people who have experienced identity theft and have completed an identity theft report at IdentityTheft.gov, which is a website maintained by the Federal Trade Commission, or filed a police report can place an extended fraud alert.
Because filers must submit evidence of identity theft, they are "almost certainly the victims of identity theft" and do not file this alert simply out of worry, according to the Philly Fed paper.
Credit bureaus are legally mandated to offer this product to consumers, per the Fair Credit Reporting Act.
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,"
For many victims, this delay is worth it because it can help to prevent any future impacts to their credit score. And, according to the research from the Philadelphia Fed, this vigilance pays dividends.
Fraud's immediate, negative effects
The researchers documented clear signs of fraud preceding or coinciding with the alert filing. For example, filers often reversed their address to a prior address, suggesting the consumer was correcting address changes criminals made.
These and other signs serve both as evidence that alert filers are true victims of identity theft (rather than merely cautious) and that, even in cases where the consumer is not directly liable for fraud losses after identity theft, they still experience negative consequences.
Among the biggest negative consequences, the victim's Equifax credit score declined by 2.5 points on average just before filing an alert.
This credit score decrease was often the result of a large, temporary increase in credit inquiries against their identity, peaking in the quarter the alert was filed. Fraudsters also often opened new credit card accounts opened in the victim's name.
Persistent post-fraud improvements
After consumers file an extended fraud alert, negative consequences from the fraud quickly disappear from their credit records, the study found.
More significantly, the victims experienced substantial, persistent improvements in their credit standing and financial habits.
Extended alert filers saw their credit scores increase by an average of 11 points after the immediate negative effects of fraud faded, and this improvement lasted up to five years.
The researchers found that this stemmed from more than just removing fraudulent accounts. For example:
- Filers maintained a lower incidence of major derogatory events (like charge-offs or foreclosure) by about 4 to 7 percentage points.
- They maintained a lower incidence of third-party collections by about 5 percentage points.
- They kept a higher proportion of their credit card balances in good standing.
These persistent improvements suggest filers, after experiencing identity theft, actively changed their repayment habits and corrected pre-existing errors in their reports they had previously missed.
The paper said these findings suggest that extended alert filers become more wary and careful after the shock of a fraud event.
Filers borrow more at lower risk
Notably for U.S. financial institutions, the research documented that many extended alert filers actively leveraged their improved creditworthiness to apply for additional credit.
The paper found clear evidence of increased secured credit usage in the years following the alert filing.
For example, filers became new auto loan holders at higher rates, increasing their average auto loan balances by up to $500, which was a 7% increase.
A significant number of filers also became new mortgage holders. Average mortgage loan balances increased by up to $12,000 — a 5% increase relative to the mean — as a result of new mortgage activity.
The paper found that these consumers, despite obtaining additional loans and increased balances, manage their credit "as well as or better than they did before financial fraud" for at least five years.
