Avoiding Identity Theft

Chances are you’ve read stories recently touting identity theft as the fastest growing crime in America. Are consumers becoming more careless with their personal information? Are companies becoming more careless with the personal information they compile from clients and customers? Are identity thieves becoming more sophisticated?

The main reason identity theft seems to be running rampant and companies seem to be getting more careless with personal information is the result a California law passed in 2003. It requires companies doing business with California residents to inform all of their California customers if the company loses any names and personal information (Social Security numbers, driver’s license numbers, credit card or debit card numbers) or if someone steals this information from the company. Data theft and data loss, of course, occurred before the California law. Now, however, companies must report it publicly. In the wake of the law, Boston College, the University of California at Berkeley, ChoicePoint, Lexis-Nexis and Bank of America, to name but a few, all reported either losing personal information from their data bases or having third parties tap into their databases to access personal information.

In order to steal an identity, a thief needs information: a credit card number, a Social Security number, a date of birth, a driver’s license number. Other than bad luck or negligence on the part of companies who have your personal information, how else can thieves obtain your personal information? Though the image of an identity thief is usually high-tech (someone with the know how to hack into your personal computer for instance), in reality identity theft happens most often the low-tech way. A thief steals a wallet or purse, rummages through your mailbox, takes packages left on your doorstep or finds carelessly discarded bills, account statements or other documents with the necessary information on them.

How can you protect yourself against identity theft?

Here are some cautions that re-emphasize the discussion of this topic in our book on Wealth Management. First of all, there are two types of identity theft:

• "Account takeover" Someone acquires your existing account information, such as a credit card number, and uses it to withdraw money or purchase products and services.

• "Application fraud" Someone acquires your Social Security number or other personal identifying information to open new accounts in your name or to create a whole new identity for themselves.

Of the two, application fraud is more onerous because the fraud is covert. It is also much less frequent. Some estimates indicate application fraud only affects about 1% of Americans (but, that’s still 3 million people!). Imagine how difficult it is to discover accounts that you didn’t open and, therefore, don’t know about, especially when statements aren’t being sent to your address. Victims of application fraud typically don’t learn of the problem until a collection agency comes calling or creditors decline to offer further credit.

For compromised credit card numbers, however, which make up the majority of account takeover thefts (in turn these make up the vast majority of identity theft cases), if you are reasonably vigilant and report the loss or theft within two days of discovery Federal law limits your liability to $50. In many cases the credit card company will even waive that. The biggest problem with account takeover is inconvenience…waiting for your new credit card to arrive and reestablishing automatic payments linked to your former credit card can be a hassle.

We mention this to try to put the broader category of identity theft into context. If someone steals your credit card number (account takeover) you will have a much easier, though still inconvenient, time recovering from it than if somebody takes your identity and creates a parallel you (application fraud). In that case, you could spend the next several years trying to recover.

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