How Data Breaches Can Affect Your Credit Score
Data breaches are not rare events. They’re a constant threat. When you shop online, open a new account, or share your information with a service provider, your personal data could be at risk.
If that data falls into the wrong hands, there could be major consequences for your credit score. Fraudulent accounts, unauthorized purchases, and missed payments caused by identity theft can quickly damage your financial reputation.
In this article, Class Action U breaks down how data breaches can affect your credit and what you can do to protect yourself and recover if your information is compromised.
Understanding the Impact of Data Breaches on Your Credit Scores
Your credit score is a three-digit number that reflects your financial trustworthiness. It affects whether you can rent an apartment, obtain a car loan, qualify for a mortgage, and the interest rate you pay on a loan. The higher your score, the more likely lenders will see you as a responsible borrower. That’s why any threat to your score, such as a security breach, deserves serious attention.
Identity Theft and Fraudulent Accounts
Criminals may use stolen information to open new credit cards, take out loans, or create utility accounts in your name. These fraudulent accounts can lead to unpaid bills, which can negatively impact your credit rating.
Increased Credit Inquiries
If someone uses your information to apply for multiple lines of credit, each application can generate a hard inquiry, sometimes called a hard pull. Multiple hard inquiries within a short period can lower your credit score and make you appear financially unstable.
Maxed-Out Credit Utilization
Hackers may run up charges on your credit cards, pushing your balance close to the limit. A high credit utilization ratio negatively impacts your score, even if the charges are not yours.
Late or Missed Payments
When fraudulent accounts go unpaid, they eventually appear as late or missed payments. These derogatory marks are among the most damaging elements to your credit score.
Long-Term Credit Repair Challenges
Even after you dispute and remove fraudulent activity, it can take months or longer to restore your credit fully. In the meantime, you might face difficulty qualifying for loans, credit cards, or rental agreements.
Debt Collection Accounts
If fraudulent accounts remain unpaid for an extended period, they may be picked up by collection agencies. Once an account is in collections, it can stay on your credit report for up to seven years and significantly lower your score. It is possible to fix it, but the process is often time-consuming and complicated, especially if the debt has already been sold to multiple collectors.
Issues like these can significantly weaken your credit profile, and the effects can worsen if not addressed quickly. The sooner you recognize the signs and take action, the better your chance of limiting the damage to your credit profile.
How Hackers Use Stolen Information To Harm Your Credit
Once your personal data is exposed in a data breach, cybercriminals may use it in several ways to damage your credit, including:
- Opening Fraudulent Credit Accounts: With just your name, Social Security number, and address, hackers can apply for credit cards, loans, or retail financing in your name.
- Making Unauthorized Purchases: A criminal can rack up charges, pushing your balances to the limit and negatively impacting your credit.
- Multiple Loans Hard Inquiries: Each credit application triggers a hard inquiry. Multiple inquiries within a short time can negatively impact your score.
- Changing Account Information: Hackers may modify your email address, phone number, or mailing address to prevent you from receiving alerts and promptly detecting fraud.
- Selling Stolen Data on the Dark Web: Even if the original hacker doesn’t use your data, they might sell it to others, making you vulnerable to repeated attacks.
- Taking Over Existing Accounts: Criminals can hijack bank or credit accounts, transfer funds, or take out cash advances.
- Draining Bank Accounts Leading to Overdrafts: If your checking or savings account is compromised, hackers can withdraw all available funds, triggering overdrafts and missed payments.
How Different Credit Scoring Models May Affect Your Credit Score When Fraud Happens
When fraud damages your credit profile, the impact can vary depending on the credit scoring model used. The two major players, FICO and VantageScore, analyze similar data but weigh certain factors differently.
Understanding these differences can help you better anticipate the potential impact of fraudulent activity and guide your recovery efforts.
FICO vs. VantageScore Models
Both models assess payment history, credit utilization, credit history length, types of credit, and recent activity. Although VantageScore tends to update more frequently and may consider alternative data sources, more lenders use FICO.
Here’s how each model typically responds in specific credit scenarios:
- Hard Inquiries Impact: Both models lower your score for new credit inquiries, but FICO is stricter if multiple inquiries occur within a short timeframe. VantageScore groups inquiries within a shorter window.
- Credit Utilization Penalties: High credit utilization, particularly from unauthorized purchases, negatively impacts your score under both models. VantageScore may respond more quickly to changes in utilization.
- Late/Missed Payments Treatment: Both models flag missed payments as a major negative factor, even if they stem from fraud.
- Dispute Recovery Timelines: VantageScore may reflect corrected or disputed information more quickly than FICO, which can take longer to update and reflect changes.
- Long-Term Credit Impact: If fraudulent activity remains unresolved, both models will continue to reflect this damage, making it more difficult to access affordable credit.
Knowing how these models treat activity on your credit report can help you track the effects of fraud, but understanding your legal options and rights can also help with your recovery.
Signs That a Data Breach Has Affected Your Credit Score
Not every drop in your score is a red flag, but continuously monitoring for unusual changes can help you act quickly before more damage is done. Common warning signs that a data breach may have affected your credit score or personal financial information include:
- A sudden and unexplained decrease may signal that someone has opened fraudulent accounts or missed payments in your name
- Credit reports showing unfamiliar credit cards or loans could mean someone has used your personal information to apply for credit
- Unrecognized hard inquiries from lenders you’ve never contacted might indicate someone is trying to open accounts in your name
- Fraudulent purchases on existing accounts may cause your credit usage rate to rise
- Collection notices or past-due alerts for accounts you didn’t open may be a red flag
- Unusual charges or login attempts may indicate a compromised account
- Calls or letters about debts you don’t recognize could mean identity theft
- Unsolicited update requests regarding your email, phone number, or mailing address may be attempts to lock you out
Seeing one of these signs doesn’t always mean someone stole your identity, but always pay attention to multiple warnings.
How To Protect Your Credit Score After a Data Breach
If you suspect your information has been compromised in a data breach, take action immediately to protect your credit, stop misuse of your identity, and limit the potential damage to your credit score. Steps you can take include:
Set Up Transaction Alerts With Your Bank
Many banks and credit card companies allow you to enable real-time alerts. These can notify you immediately about any activity, helping you spot fraud as it happens. It’s also good practice to regularly scrutinize your bank and credit card statements for any unfamiliar charges or withdrawals.
Check Your Credit Reports Immediately
Periodically request your credit reports from Equifax, Experian, and TransUnion. Look for unfamiliar accounts or activities. In addition, enroll in a credit monitoring service or set up alerts to detect suspicious changes in real time.
Place a Fraud Alert or Credit Freeze
Consider placing a fraud alert or credit freeze on your accounts. A fraud alert makes it more difficult by requiring extra verification steps. A credit freeze goes further by blocking all access to your credit report until you lift it, making it nearly impossible for new accounts to be opened in your name.
Dispute Unauthorized Accounts or Transactions
Report any fraudulent accounts or charges to the credit bureaus, banks, and lenders to have them removed and minimize damage to your credit score.
Update Your Passwords and Enable Two-Factor Authentication
Strengthen the security of your financial and personal accounts by creating strong passwords and enabling two-factor authentication whenever possible to prevent unauthorized access.
These steps can reduce the risk of ongoing damage and help you regain control of your credit profile. You can also join an existing class action if one related to your cyber incident is already underway.
Recovering From Credit Damage After a Data Breach
If your credit has been damaged by unauthorized data access, recovery requires persistence, thorough documentation, and patience. Start by disputing all fraudulent accounts and charges with the credit bureaus and lenders. Once the errors are corrected, focus on rebuilding your credit profile by making on-time payments, keeping credit utilization low, and avoiding new hard inquiries unless necessary.
How Long Does It Take To Recover?
It varies. Some people may see improvements within a few months, while others could need a year or more, depending on the extent of the fraud and how quickly disputes are resolved. No matter the timeline, remain persistent until you’ve erased the consequences of fraud.
What Are Your Rights?
Under the Fair Credit Reporting Act, you can dispute inaccurate information on your credit report and place fraud alerts or freezes on your credit file at no cost. Some identity protection services will offer to freeze your credit at a cost, often as part of a subscription, but all three major credit bureaus will freeze your credit report for free.
FAQs
It’s common to have lingering questions about how to protect your credit following a data breach. Here are answers to some of the most frequently asked questions.
Should I Enroll in Credit Monitoring?
Yes, credit monitoring can alert you to changes in your credit report. It’s a valuable tool for identifying fraud early and taking prompt action.
Can a Single Breach Ruin My Credit Score?
It depends on how the stolen information is used. If you catch fraud quickly, you can often limit the damage. Left unchecked, however, a single breach can cause long-term harm.
Does Freezing Your Credit Affect Your Score?
No, freezing your credit does not impact your score. It simply prevents new accounts from being opened in your name.
Legal Options for Data Breach Victims
If your personal information was exposed in a cyber breach, you may have legal options to help you recover compensation. Class Action U connects you with experienced data breach attorneys who can evaluate your case, explain your legal rights, and help pursue compensation. You don’t have to navigate this alone.
Did you receive a notice letter in the last 30 days informing you that you were affected by a security breach? Sign up for a data breach investigation.
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