Using Your Credit Report to Protect Against Identity Theft

There are many things your credit report isn't. It isn't well-written or even necessarily very accurate. But it's still the single most important document for protecting yourself from identity theft.

What makes this simple document so valuable? It's a record of your financial life. No other document contains as much financial information about you -- and your borrowing and spending habits -- as your credit report. Your credit report includes your name (and any other name you've borrowed credit under), your Social Security number, current and past addresses and phone numbers, and current and former employers. It also tracks every account opening and closing, every late payment and every dime you borrow.

Interpreting your credit report. Only a few years ago, figuring out what all the gibberish on your credit report meant required the equivalent of a degree in finance -- or the ability to read hieroglyphics. But recently, the reports have become a lot more consumer-friendly, as the three credit-reporting agencies -- Equifax (www.equifax.com), Experian (www.experian.com) and Transunion (www.transunion.com) -- have come under pressure from government agencies and consumer-advocacy groups to make the files easier to understand.

Today's credit reports are broken down into four basic sections: information that identifies you, your borrowing history, any public records available and the types of companies that have requested information about your file.

Section one includes information specific to you. It's very common to find errors -- and occasionally fraudulent information -- in this section. Don't panic: It's not unusual to find that your name has been misspelled or that many variations of your name appear. Credit-reporting companies rely on information provided by your creditors, and often something gets lost in the translation.

But there is cause for alarm if you discover an entirely different name, address or driver's license number on your file. These are a few red flags for possible identity theft.

Next comes your credit history. Here you'll find a line-by-line description of every creditor account that has been reported to the agency. These entries include:

• The name of the lender and account number
• When the account was opened;
• Whether it is an installment account (such as a car loan) or a revolving account (such as a credit card);
• Whether the account was opened with another person;
• The account's credit limit and your outstanding balance;
• The size of the monthly payment;
• Whether the account is still open, and if not, who closed it;
• The number of delinquencies on the account;
• Whether the account went into collection or was written off by the creditor.

You'll want to spend some time looking over this section carefully. For example, people with very common surnames sometimes find that someone else's account information appears on their credit report. It happens most often within families -- a father's mortgage might appear on his college-age son's credit report because they share the same name.

When my husband and I purchased our first home back in 1992, I'll never forget the look on my husband's face when our mortgage broker presented him with a credit report that read like a criminal rap sheet. The report was littered with past-due accounts that he'd never opened, and that included all of his father's credit lines as well. Some of the accounts were opened in the early 1960s -- before he was born! It turns out that many delinquent borrowers share my husband's last name.

Errors such as these abound in individual credit reports, according to a 2004 study by the National Association of State Public Interest Research Groups. The group collected 200 surveys from adults in 30 states who reviewed their credit reports for accuracy. Here's a rundown on some of the most common mistakes found:

• Seventy-nine percent of the credit reports contained mistakes of some kind.
• Fifty-four percent contained personal demographic identifying information that was misspelled, long-outdated, belonged to a stranger or was otherwise incorrect.
• Thirty percent contained credit accounts that had been closed by the consumer but incorrectly remained listed as open.
• Twenty-five percent contained errors such as erroneous public records that were serious enough to result in the denial of credit.

While most people believe the borrowing history contains the information that is most harmful to their credit scores, the real damage happens in the next section: public records. Here you'll find public filings on such things as past judgments, liens and bankruptcy-protection filings. If you've ever been convicted of a criminal activity, such as drunken driving, your record very well might show up here, too.

Finally, the "inquiries" section of your credit report lists the types of companies that have requested information about you. There are two types of inquiries: hard and soft. Whenever you do such things as request a copy of your own credit report, apply for a credit card or sign up for a new cellphone plan, it's considered a hard inquiry. Soft inquiries, on the other hand, are initiated by companies that want to sell you something, such as a new rewards credit card or preapproved line of credit.

The number of inquiries is factored into the formula that determines your credit score. A large number of hard inquiries is seen as a negative in that you may be taking on too much credit. But scoring companies understand that consumers may need to make a number of inquiries in a short span of time when shopping for mortgages or car loans, and they factor that into the scoring accordingly.

Correcting credit-report errors.

To dispute an error on your credit report, you need to create a paper trail. Keep copies of all documents you send or receive from the credit agency or the lender and the names and phone numbers of people who contacted you about your dispute. Contact the credit-reporting agency and the lender who provided the inaccurate information (if it's clear where the bad information came from) to dispute the claim in writing.

Send your dispute letter by certified mail so you have proof that the letter was received. You can also dispute the error online on the Web sites of the three credit-reporting agencies, but if you decide to do this, be sure to print the claim for your records. By law, the agencies have just 30 days to respond to your request to fix the error, and they must notify other agencies of the correction if the error has dented your score. If you don't like the response you get from the credit-reporting agency, you can mail the agency a letter explaining your side of the story and ask that your letter be permanently attached to your file.

You should regularly review your credit report, keeping an eagle eye out for such things as unrecognizable names, a change of address, accounts you don't recall opening or past-due notices on accounts that you did open in the past but no longer use. You can order a free annual report from each of the three major credit-reporting bureaus online at Annualcreditreport.com, or by calling 877-322-8228. If you stagger your requests for free reports throughout the year, you'll be reviewing one of your reports every four months.

If you don't have the time or the inclination to monitor your credit reports this diligently, many companies, including the credit-reporting agencies themselves, offer credit-report monitoring services -- for a price. Services may include access to your credit score (the number lenders use to determine your creditworthiness), identity-theft insurance and daily email alerts.

As an additional barrier to identity theft, several states allow consumers to issue a "freeze" on their credit reports, meaning that the credit bureau cannot release your credit report to anyone without your approval. Very few lenders are willing to extend credit without seeing a copy of an applicant's credit report, so the freeze generally stops an identity thief from using your information to obtain a loan. If you live in a state that requires a credit bureau to honor your request for a freeze, you still have to initiate the freeze with each credit bureau independently.

Is there a downside to freezing your credit report? You bet.

First, it's probably going to cost you unless you've already been a victim of identity fraud. Florida, for instance, allows a credit bureau to assess a $10 fee to place, temporarily lift or permanently remove a credit freeze. And you'll be incurring that fee each time you want to apply for new credit. It also takes a few days to get the freeze temporarily lifted, so no more impulse purchases using a retailer's offer of discounts in exchange for signing up for the store's revolving charge card. And there's the inconvenience of keeping track of the PIN that the credit bureau issues you when you first place the freeze. You'll need that PIN each time you want to lift the freeze.

But while a credit-report freeze can be a stumbling block for consumers, it can be worth the extra hassle for the peace of mind it provides.