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Reducing Identity Theft Risk: Do Free Credit Reports Make a Difference?

Identity theft is the stealing of a victim's personal information to commit a crime such as making fraudulent charges on a credit card. According to a September 2003 Federal Trade Commission report, an estimated 27.3 million Americans have been victims of identity theft in the last five years, including 9.91 million people, or 4.6% of the population, in 2002 alone.

Checking a credit report regularly for evidence of identity theft is a commonly recommended practice. Newly enacted Federal legislation, the Fair and Accurate Credit Transactions Act of 2003 (signed into law on December 4, 2003), will soon require that free credit reports be provided annually to all U.S. residents upon request. Currently, only six states (CO, GA, MA, MD, NJ, and VT) mandate free credit reports.

According to the Federal Trade Commission, the cost of an incident of identity theft is significantly reduced if the misuse of the victim's personal information is discovered quickly. When the misuse was discovered within 5 months of its onset, the value obtained by the thief was less than $5,000 in 82 percent of cases.

Unfortunately, identity theft often goes undetected for months, allowing fraudsters the luxury of time to commit their crimes. It takes 14 months, on average, between the time that information is stolen and when a victim discovers the theft. One reason is that fraudsters often use change of address forms or fraudulent addresses to divert a victim's mail (e.g., credit card bills) to another location. Many people discover that their identity has been stolen only after they request a credit report and see new accounts listed that they did not open.

Rutgers Cooperative Extension recently conducted an exploratory study of a small convenience sample of respondents to its online Identity Theft Risk Assessment Quiz to assess the frequency of credit file requests as a strategy to reduce identity theft risk. The study also tested for differences between states that mandate at least one free credit report annually upon request and those where residents must pay a fee of up to $9 to receive a copy. The quiz from which data were obtained is available online at www.rce.rutgers.edu/money/identitytheft.

In an initial analysis of responses to the Identity Theft Risk Assessment Quiz, data were collected from 287 respondents. The quiz item with the lowest average score was "I check my credit report from each of the three major credit bureaus (Equifax, Experian, Trans Union) annually to look for errors and evidence of identity theft." In addition, no significant difference was found in the frequency of making credit file requests between residents of states mandating free credit reports and others, suggesting that cost may not be a primary barrier.

This study is limited in generalizability because the sample was small, convenient, and non-random. In addition, some respondents were specifically directed to the quiz Web site. Nevertheless, the findings are instructive. Study results suggest that some consumers may not know how to request their credit file. A one-page Credit File Request Form for consumers can be downloaded at Rutgers Cooperative Extension's Web site www.rce.rutgers.edu/money2000
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Another implication of this study is the need to include a credit report review as part of an annual "financial check-up." If lack of time is a barrier to obtaining a credit report, this service could be provided for a modest cost by the increasing numbers of financial planners who provide services for an hourly fee on an as needed basis to middle income households.