July 7, 2023
Written by Jackie Lam
AFC® Financial Coach
AFC® Financial Coach
Jackie Lam, AFC®, is an L.A.-based financial writer and educator whose clients include Fortune 500 companies and FinTech startups. Her work has appeared in Forbes Advisor, Business Insider, Salon.com, and CNET.
Do you know how to protect yourself from financial identity theft? Learn what identity theft is, how it happens, and how to prevent it.
No one wants to fall victim to identity theft, but the reality is it can happen to anyone. Every year the Federal Trade Commission (FTC) receives millions of identity theft reports with total losses in the billions.1
If you want to learn how to prevent identity theft, keep reading to learn about identity theft, how it happens, and what you can do to protect yourself.
Identity theft is when a scammer steals sensitive personal information to use to their advantage. The most common type of scam? You probably guessed it — financial identity theft. That's when a scammer uses your info for financial gain.
Your Social Security number, name, home address, or credit card number are used to get a tax refund, take out a loan, open new bank accounts in your name, or make purchases.
Why is it so important to protect yourself? Depending on the type of theft and your situation, you could be on the hook to pay part of the financial damage. According to the FTC, consumers reported a nearly $8.8 billion loss to fraud last year. This is a 30% increase in reported losses compared to the year before.2
In the case of identity theft, what you don't know can hurt you. To help protect from identity theft, keep these seven main categories in mind:
Credit identity theft is when a scammer uses your information to take on new credit or gain access to your existing credit.
There are two categories of credit identity theft:
Credit card fraud: a thief uses your personal information to get a new credit card, or your credit card is used to make purchases.
Loan fraud: your information is used to apply for a loan in your name. While someone else may receive funds from the loan, you'll be on the hook for paying it off.
How to avoid it:
Regularly review your credit report to look for inaccurate or fraudulent information.
Consider signing up for a credit monitoring service.
Freeze or lock your credit report to prevent a fraudster from opening a new credit account.
Even those under 18 can fall prey to identity theft, potentially creating severe financial consequences for their future.
For example, a child's Social Security number can be used to open a bank account or credit card, rent a place, apply for a job or government benefits (such as disability) or unemployment, apply for utility services, or to get a loan.
Since children aren't legally able to apply for accounts and don't typically have credit files, this type of identity theft can go unnoticed for years.
How to avoid it:
Before sharing your child's personal information, always ask questions and understand if it is necessary.
Teach your children how to protect their information online.
Monitor your children's social media accounts.
As the name implies, synthetic identity theft combines fake and real information to create a pseudo-fake identity.
A thief can use your name and Social Security number in combination with a fake mailing address and email to open fake accounts or take out a loan.
Because synthetic identity theft is using more than one person's info, it can make it harder to detect. For instance, because these new credit lines aren't reported on your credit report, you might not know you've been a victim for some time.
How to avoid it:
Keep your personal documents in a safe location.
Limit the information you post on social media.
Protect your computer with digital security software and your phone by allowing regular software updates.
Be on the lookout for email or text scams that request personal information.
Early in this year's tax season, the Internal Revenue Service (IRS) flagged nearly 1.1 million tax returns for identity fraud.3
In taxpayer identity theft, your Social Security number or other personal information is used to file a tax return and claim a refund.
Your refund is deposited into a bank account or through a check in the mail to an address so a scammer can get their hands on your money.
These scammers usually file returns electronically and do so early in the season. That way, they get to file a return to the IRS before you do, blocking you from filing a legit return.
How to avoid it:
Store your tax records in a secure location.
Request an Identity Protection Personal Identification Number (IP PIN) from the IRS to verify your identity when filing your tax return.
Shred all tax-related documentation before disposing of it.
This form of financial identity theft is anything related to your financial accounts. For instance, your personal information is used to open a new bank account, or your debit card number is used to make fraudulent purchases.
A scammer might also make online purchases using your PayPal account or find a way to get into an existing online Amazon account and make purchases that way.
How to avoid it:
Avoid sharing your account passwords.
Avoid logging into your accounts on public Wi-Fi, as it's not protected.
Set up two-factor authentication on all of your accounts.
This isn't a direct form of financial identity theft, but it's important to mention because there can be financial consequences.
In medical identity theft, your personal information, like your name or Medicare number, is used to receive medical services or government benefits.
Your medical record is filled with bogus information, which can be time-consuming to correct. This false information can sometimes block you from receiving the services you need.
How to avoid it:
Avoid sharing your health care insurance information unnecessarily.
Carefully review your medical statements to ensure accuracy.
Beware of unsolicited emails or phone calls asking you to provide medical information.
Regularly read your credit report to look for fraudulent unpaid medical expenses.
Criminal identity theft is another form of non-financial identity theft. It can occur when a scammer uses your name and personal information to pretend to be you to law enforcement officials.
For instance, if a thief gains access to your ID and other personal information, they could use it to pose as you when they get pulled over for a traffic violation.
This kind of theft can come as a total surprise as you might not find out about it until you receive a court summons for an unpaid ticket.
How to avoid it:
Keep a close eye on your physical documents, identification, credit cards, and debit cards. If something is stolen, report it immediately.
Don't share identifying information online. For instance, if you just got your license, don't share a picture of it on social media.
Use strong passwords that include a mix of numbers, upper and lower-case letters, and symbols to protect your personal information online.
You can do your part to protect yourself from potential identity theft. Whenever your personal details are requested, carefully consider why that person needs your information and the potential risks of sharing it.
If you don't need to share your personal info, be cautious and keep it to yourself. By proactively protecting your information, you can prevent yourself from experiencing the consequences of a stolen identity.
Three ways to prevent identity theft include: avoiding public Wi-Fi, not sharing your passwords, and regularly reviewing your credit report to check for signs of fraud.
Some common methods thieves use to steal your identity include:
Phishing. You receive a fraudulent email supposedly from your bank or utility company asking you to provide sensitive information like your password or credit card information.
Smishing. This is similar to phishing but is delivered as a text message instead of an email.
Hacking. Thieves can connect to public Wi-Fi and look for opportunities to steal your private information.
Dumpster diving. A good old-fashioned dumpster dive is still a common way to steal your identity. Thieves rummage through your trash to find personal information.
If you believe you are the victim of identity theft, you can order credit reports from all three major credit reporting companies to look for signs of fraud. If you find information that appears fraudulent, you can report it to the Federal Trade Commission at identitytheft.gov. You can also ask each credit reporting agency to put a security freeze on your credit to prevent new credit accounts from being opened in your name.
To report a stolen identity, contact the Federal Trade Commission (FTC) at identitytheft.gov, or call (877) 438-4338. You will answer questions about what happened, and an Identity Theft Report will be created using this information. In some cases, you may be advised to contact the police to report the identity theft.
The purpose of asking for your Social Security Number (SSN) when you apply for a credit card is to help prevent identity theft. However, some credit cards don't require a SSN, so it may be possible for someone to open a credit card in your name.
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