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Identity theft’s upside: Higher credit scores

Kelly Dilworth

There’s a surprising silver lining to having your identity stolen: It could motivate you to clean up your credit and improve your long-term credit scores.

While identity theft dents people’s credit scores in the short-term, credit scores then go up sharply and stay elevated for years, an October 2016 working paper from the Federal Reserve Bank of Philadelphia found. In fact, the long-term effects of fraud on credit scores “are often positive and larger than the negative short-term effects,” the “Identity theft as a teachable moment” study says.

Once people remove evidence of the identity theft from their credit reports — a process that can take as long as three to six months — their credit scores often jump an average of 12 percentage points and “remain elevated for at least several years after the identity theft.”

That average credit score bump — large enough increase to push some consumers into the prime or super prime category for credit scores — can substantially reduce the amount of interest they have to pay.

Along with the increase in credit scores, the study also found “persistent reductions in the share and number of bank card accounts past due, delinquencies, third-party collections and other derogatory events.”

The findings suggest that “some consumers were less attentive to their credit records before experiencing a severe identity theft event.”

For example, identity theft victims may have missed errors on their credit reports for years. Once the identity theft victims filed an extended fraud alert, they received free access to their credit reports two times a year and may have started to monitor their credit more closely and fix any errors on their reports.

In addition, the authors speculate that identity theft may have caused some people to learn more about their credit and behaviors that lead to higher credit scores. “For some consumers, identity theft or fraud may serve as a teachable moment, increasing their attention to credit information,” the study says.

The study is based on records pulled from the Federal Reserve Bank of New York’s consumer credit panel/Equifax data set and credit reports of consumers who filed an extended fraud alert with Equifax.

Your bottom line
If you become a victim of identity theft, don’t panic. You should be able to scrub all evidence of the identity theft from your credit reports relatively quickly by asking the credit bureaus to correct and block any information coming from the fraudulent accounts and by asking affected businesses to stop reporting information about a fraudulent account.

Once your reports are fraud-free, use the experience to reflect honestly about your credit habits. You may find that a stroke of bad luck was just the kick you needed to start fresh and improve your credit for good.

See related: 10 warning signs of identity theft — and what to do if you’re a fraud victim

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