How Identity Theft can Damage Your Credit Score

In this digital age, it is quite common to hear stories of hacking and identity theft. Though there could be many significant risks of identity theft, one of the most common and concerning consequences is the potential damage it can cause to your credit score. In this article, we talk about how identity theft can damage your credit score and how you can protect yourself.

Before we delve deeper, let us first understand what identity theft is.

When someone obtains your sensitive personal information like Aadhaar Number, PAN, Credit Card Details or other financial data and uses it for their own financial gain, it is termed as identity theft. Scammers can use your details to open new credit accounts, commit fraud or make unauthorized transactions, which can ultimately damage your credit profile.

Relationship between Identity Theft and Your Credit Score

Your credit score represents your creditworthiness and it is influenced by several factors such as payment history, new credit enquiries, credit utilization ratio, number of credit accounts, length of credit history, etc. When your identity is stolen, the activities carried out by the thief can disrupt these factors, leading to a decline in your credit score. Here's how:

1. Opening unauthorized credit accounts

Someone who has access to your personal details can use it to open new credit accounts in your name. It could be a credit card or loan that you are unaware of. When the bills on these unauthorized accounts go unpaid, it can quickly accumulate debt as interest charges and penalties start adding up. All this can be quite detrimental to your credit score.

2. Making unauthorized transactions

If an identity thief gets access to your sensitive financial information like your credit card or bank account, they can make unauthorized transactions, which can add up to huge debt, if not noticed and rectified on time.

3. Increased credit utilization ratio

By making large unauthorized transactions on your credit cards, identity thieves can lead to your credit utilization ratio shooting up. A high CUR, especially if continued for several months, can lead damage your credit score.

4. Negative impact on payment history

Payment history is given the highest weightage in calculating your credit score, accounting for about 35% of the score. If an identity thief fails to pay the bills on fraudulent accounts opened in your name, these missed payments will be reported to the credit bureaus under your name. As a result, your payment history will show delinquencies, which can lead to a sharp decline in your credit score.

5. Multiple hard enquiries

Whenever you apply for a loan or a credit card, a hard inquiry is initiated on your credit profile. While one or two hard inquiries will have minimal impact, multiple applications within a short span can signal financial distress and lower your credit score. Identity thieves often apply for several lines of credit consecutively, leading to a drop in your score.

How to protect yourself from identity theft?

As seen above, the potential damage identity theft can cause to your credit score is quite substantial. Hence, it is essential to take proactive steps to protect yourself:

• Monitor Your Credit Report Regularly: You must make it a habit to regularly check your credit report. Nowadays, a number of third-party platforms like the Paisabazaar Website offer you free credit score, along with monthly reports at minimal cost. You must check your reports and look for unfamiliar accounts, incorrect information, or suspicious activity, and report any discrepancies immediately.

• Secure Your Personal Information: There are many ways to safeguard your Aadhaar, net banking passwords, credit card details and other financial information. Use strong, unique passwords for online accounts, and be cautious when sharing personal information, especially online.

• Be Wary of Scams: Scammers often use phishing to trick you into providing your personal information. Be cautious of unsolicited emails, phone calls, or messages asking for sensitive information. Before responding to any email or digital communication, verify the legitimacy of the source.

• Use Credit Monitoring Services: Consider enrolling in credit monitoring services that alert you to changes in your credit report, such as new accounts or inquiries. These services can provide early warning of potential identity theft and also help you improve your credit health.

• Shred Sensitive Documents: Dispose of financial statements, credit card offers, and other documents containing personal information securely. Shredding these documents can prevent scammers from obtaining your information from the trash.

Identity theft is a serious issue and it can cause serious damage to your credit score and financial well-being. By understanding how identity theft can impact your credit score and taking proactive measures to protect yourself, you can reduce the risk of falling victim to it.

Regularly monitoring your credit report, keeping your personal information secure, and being vigilant against potential scams are critical steps in safeguarding your identity and maintaining a healthy credit score.