What Are the Long-Term Financial Impacts of Identity Theft?

Reviewed by Ian Lyngklip

Key Takeaways

• One fraudulent account hits your score three separate ways.
• Most adverse entries can legally stay on your report for seven years.
• The seven-year clock starts 180 days after the delinquency, not at collection.
• Never ignore a lawsuit over a fraudulent debt; silence becomes a judgment.

When you learn that you are the victim of identity theft, it can be incredibly overwhelming as you attempt to dispute the fraudulent charges and resecure your information. However, it’s also important to understand the long-term impacts that this theft can have on your finances to understand not only what to expect, but also how to begin the recovery process. The following blog explores what you should know about these matters, how to protect yourself from future identity theft, and the importance of working with a Michigan financial identity theft lawyer to assist you through this process.

What Are the Common Long-Term Financial Impacts of Identity Theft?

When someone compromises your identity, it is generally with the intention of making purchases or opening accounts in your name so they can reap the financial benefits without being financially responsible for the terms of the contract. Unfortunately, identity theft often goes unnoticed for a period of time, with many discovering they are victims when receiving letters in the mail regarding a debt they do not owe.

Unfortunately, you’ll find that one of the most significant impacts identity theft can have on your finances is regarding your credit score. When debt accumulates in your name and goes unpaid, in this instance due to the fact that it is fraudulent, it can drastically diminish your credit score. This not only makes it more difficult to obtain loans like mortgages, auto loans, or personal loans, but it can also drastically increase the interest rates on loans you are approved for. This is because a low credit score means you’re a risky borrower, even if the debt in your name is fraudulent. As such, you can pay significantly more in interest rates than you would have had the identity theft not occurred.

You may also find that other forms of financial identity theft can impact your finances. For example, if someone uses your identity to file your taxes, they can claim your return, while someone who gains access to your credit card can open new lines of credit in your name to make large purchases.

Three Ways the Score Actually Drops

It’s important to understand that the damage to your credit score will arrive through three separate mechanisms, which is why a single fraudulent account can cause more harm than the balance suggests.

Hard Inquiry

Each fraudulent application will result in a hard inquiry. All inquiries conducted carry a small penalty of their own.

Credit Utilization

New accounts raise credit utilization, meaning the share of credit you appear to be using. This is one of the largest factors that make up your credit score in any scoring model.

Ceased Payments

The most impactful matter, however, occurs when the thief stops making payments. Late payments, charge-offs, and collections can follow, all of which have the most considerable impact on your credit score.

Why “Long-Term” Is Literal

It’s important to understand that identity theft is not something that will clear in a single billing cycle. Under 15 U.S.C. § 1681c, most adverse information can legally remain on your credit report for seven years, while bankruptcy can remain up to ten years. As such, the seven-year clock on a collection account does not start when the thief stops paying, but 180 days after the delinquency that resulted in the collection. This pushes the removal date further out than most people anticipate.

The practical consequence is that a fraudulent account you never opened can sit on your file through an entire mortgage application, several job background checks, and more than one insurance renewal, unless it is disputed and removed. That is the argument for acting quickly rather than waiting to see whether it resolves itself.

When Fraudulent Debt Becomes a Judgment

A lowered credit score, though important, is not the most impactful aspect of identity theft. If a collector sues over an account the thief opened, and you do not respond, a default judgment can be entered against you, and a judgment can be enforced through wage garnishment. People who ignore collection mail because they know the debt is not theirs are the ones this happens to. A lawsuit over a fraudulent debt still requires an answer.

How Can I Prevent My Identity From Being Compromised?

Generally, the most important thing you can do to protect your identity in Michigan is to improve your digital security. This includes using strong, unique passwords, enabling two-factor authentication, and keeping your wi-fi networks secure. In addition, you should be familiar with common phishing scams, as this can help you stay alert to potential fraudulent messages, emails, or phone calls

Finally, you can enable alerts on your bank account and credit cards to receive notifications when transactions are made. This can help you quickly identify and halt fraudulent transactions, thus reducing the risk of theft.

Contact a Michigan Financial Identity Theft Attorney

As you can see, identity theft can drastically impact your financial future, which is why it’s imperative to do what you can to minimize the damage if you are a victim and prevent future fraud from occurring. As such, it is in your best interest to work with an experienced attorney at Lyngklip & Associates to understand your legal options. Our firm knows how complicated and overwhelming these matters can be to navigate, which is why we are committed to helping you achieve the best possible outcome. Contact us today to learn more.