Greg was behind on his credit card bill. He knew the string of “late payment” letters he had been receiving meant his credit score was tanking as well. Browsing online, he came across a company offering a solution: File a claim with his credit card company that he was a victim of identity theft, stating the delinquent account wasn’t his, and he would get an instant boost to his credit score. What’s more, if he persisted, he might be able to get the delinquent account completely removed from his credit report.
Sound too good to be true? Unfortunately, this scam is all too real. It’s called “credit washing” – as successful attempts effectively wash clean a person’s credit history of one or more bad debts – and is a growing problem for financial institutions, as well as for legitimate victims of identity theft.
At its heart, credit washing exploits protections Congress included in the Fair Credit Reporting Act (FCRA) designed to aid victims of identity theft. Under that law, if a consumer is a victim of an alleged identity theft, they can alert the financial institution or any of the nationwide credit bureaus, which are required by law to block the reporting of the disputed account – called a “trade line” – within four days. Granted, such a request from a consumer can be refused or later revoked if the institution can prove a misrepresentation, but that is not always possible in the narrow window of time granted by the law and the institution’s likely inability to determine malfeasance. When a delinquent trade line is not factored into a credit score calculation, that score can rise.
Sophisticated scammers will take advantage of the newly washed and improved credit score and quickly apply for new credit, beginning the cycle anew: Go delinquent, claim identity theft, get new credit at a different bank, max that out, claim identity theft. Rinse and repeat.
Over the past few years, financial institutions have seen a spike in the number of disputes on delinquent trade lines, with some reporting close to 1,000 per month. Looking back, this trend appears to correlate with a change made by the Federal Trade Commission (FTC), which provides the “identity theft report” a consumer can mail in to exercise their previously mentioned rights under the FCRA. In 2017, the FTC made it easier for victims of identity theft to exercise their rights by removing the requirement that a police report had to accompany their claim of identity theft. While this change was good for legitimate victims, it also made it easier for would-be credit washers, enabling them to take advantage of the system.
For Sara, an actual victim of identity theft, becoming one of 1,000 similar monthly reports a bank is required to investigate makes getting the high level of focused attention she deserves difficult. While the immediate credit score protection afforded by the start of the FTC process is nice, Sara likely has more significant issues to resolve – like determining the full extent of the damage, both financial and emotional, the identity theft has caused to her life. When resources are stretched thin dealing with credit washers, that puts Sara at a distinct disadvantage.
Last year the FTC drew attention to its own data, noting significant increases in reports of identity theft as well as patterns indicating abuse of the resources available at identitytheft.gov. In addition, the Commission along with the Consumer Financial protection Bureau have increased their focus on credit repair schemes through enforcement actions and consumer advisories. Unfortunately, these efforts have not curbed the abuses.
To start, tackling the problem requires industry stakeholders to address two key priorities: First, defining the issue by identifying a common set of patterns that indicate credit washing but that exclude true identity theft victims. Second, using those findings to accurately describe the size and scope of the problem, and quantifying its financial cost. While more work needs to be done, we’ve already learned some interesting behavioral trends; for example, repeat credit washers will proactively call their bank to request a credit line increase, and that any new credit they’re able to obtain is often maxed out within weeks.
As our examination of the impact of credit washing on the financial industry continues, one thing is clear: Policymakers will need to work with industry to find innovative ways to stem the flood of credit washing cases, making it harder for Greg to scam the system, while ensuring legitimate victims like Sara are afforded the protections they need.