Initial Fraud Alert

What Is an Initial Fraud Alert?

An initial fraud alert is a notice to a credit reporting bureau that an individual’s identity may have been stolen. It can alert lenders that any applications for credit in that individual’s name could potentially be fraudulent. Lenders and creditors will therefore make the individual go through additional verification steps if they apply for a loan or for credit.

According to McAfee, Americans suffered 15 million cases of identity theft in 2021, with fraudsters stealing their personal information, likeness, or possessions with the intention of using them to commit other crimes. The scale of identity theft means that individuals need to be able to take swift action if they suspect they have become a victim.

Initial fraud alerts are one of three types of credit fraud alerts – the others being extended alerts and active duty alerts.

How Do Initial Fraud Alerts Work?

Initial fraud alerts work by warning lenders and creditors to take extra care when offering finance to certain individuals. The individual places the alert with one of the three national US credit bureaus: Experian, Equifax, or TransUnion. The credit bureau that has been notified then shares the alert with the other two bureaus.

The initial fraud alert remains in place for one year. The Federal Trade Commission (FTC) advises that the individual who placed the alert can also renew it after that year has ended. The individual can do so by repeating the initial fraud alert process.

It doesn’t cost anything to raise an initial fraud alert, and the individual doing so is also entitled to a free copy of their credit report from each of the three credit bureaus as part of the process. This is over and above the standard free annual report to which they are entitled.

To place an initial fraud alert, the individual has to reach out to one of the three credit bureaus, then follow the processes of the bureau they have contacted. Anyone who has had their identity stolen, or who suspects their identity may have been stolen, can raise an initial fraud alert.

From a lender or creditor’s perspective, initial fraud alerts help identify which customers need to go through additional verification checks when applying for finance. Businesses can use them alongside their own fraud monitoring systems. This is in order to drive down their fraudulent transaction rates and comply with their obligations in terms of anti-money laundering (AML) legislation.

Where a customer has an alert on their credit file, the lender can help prevent fraud by calling the borrower as part of their application process. The lender can then require the would-be borrower to answer security questions and present additional documentation to verify their identity.

Why Are They Important for Businesses?

Initial fraud alerts are hugely important as they help financial services businesses reduce instances of fraud. They prevent criminals from using stolen identities to borrow money and open new lines of credit. They can also be beneficial in preventing fraudsters from making large purchases when they have used stolen account details to do an account takeover fraud (ATO).

Consumers in the US lost $8.8 billion to fraud in 2022 according to the FTC. Distressing though that figure is, it only tells half the story. Every dollar lost to fraud costs ecommerce and retail businesses $3.75, based on an analysis of current fraud trends in the US and Canada by LexisNexis. That’s a 19.8% increase in what fraud is costing businesses compared to the firm’s 2019 analysis. As such, anything that can help slow this increase (or preferably, reverse it) can be very helpful to retailers.

Another benefit of initial fraud alerts is that they support companies to comply with their anti-money laundering (AML) obligations. Legislation such as the European Union’s 6th Anti Money Laundering Directive (6AMLD) – and its equivalents around the world – seeks to ensure that criminals are thwarted in their attempts to use the proceeds of their crimes. Any fraudsters trying to launder money using stolen identities should find it harder to do so as a result of the initial fraud alert system.

Of course, no business should rely solely on initial fraud alerts to help identify potential cases of identity theft. Modern fraud prevention tools use a range of features and techniques to identify risky behavior that could indicate attempted fraud. Examples include enriching data based on users’ email addresses, IP addresses, phone numbers, and locations, as well as using device fingerprinting, machine learning, and predictive scoring.

Initial Fraud Alerts vs Extended Fraud Alerts

We mentioned above that an initial fraud alert is one of three types of fraud alerts: initial, extended, and active duty alerts (the latter are sometimes also referred to as active military alerts). An extended fraud alert is available to any individual who has had their identity stolen and who has also either filed a police report or completed an FTC identity theft report.

An extended fraud alert is, essentially, a heavier-duty version of the initial fraud alert. It stays on the individual’s credit file for longer: seven years, versus the one year for which initial fraud alerts last.

Like an initial fraud alert, the extended alert is free for the individual to raise. They can do so with any one of the three credit bureaus – Equifax, Experian, and TransUnion – and, again, the bureau that has been notified is obliged to share the alert with the other two.

With an extended fraud alert, the individual is entitled to not one (as with the initial fraud alert) but two free reports within one year from each of the three credit bureaus. This enables the individual to keep a close eye on their credit file, following the theft of their identity.

Another element of the extended fraud alert is that initiating it triggers a five-year freeze on unsolicited credit and insurance offers to the individual in question. The individual can ask for this marketing credit freeze not to take place if they still want unsolicited offers – but, unless they do so, it will apply by default.

What Is a Security Freeze?

A system of fraud alerts is not the only way that individuals can protect themselves from fraudsters using their stolen identity to apply for credit. They can also apply security freezes to their credit. A security freeze is a process that stops new creditors from accessing the individual’s credit file and from opening any new accounts in their name.

Security freezes are free, and individuals can request that credit bureaus implement them at any time. They can also unfreeze at any time.

Unlike with fraud alerts, the individual must contact each of the three credit bureaus if they want to implement a freeze with all three. The bureaus will not inform each other of this happening.

There are some exceptions to a security freeze. Creditors with whom the individual already has an account can still access their report. Access relating to insurance, employment, tenancy screening, and government agency requests can also go ahead.

How Does an Initial Fraud Alert Help Fight Fraud?

An initial fraud alert can help fight fraud by making it harder for fraudsters to profit from stolen identity and account details. Such alerts empower individual victims of identity theft to take swift action to protect themselves from further harm. They can protect victims who have been defrauded and those who are at risk due to their personally identifiable information being compromised.

Identity theft can leave victims hugely out of pocket and ruin their credit scores – leaving them with a whole heap of problems to sort out, all of which is emotionally draining and time-consuming. Initial fraud alerts aim to reduce the chances of this happening.

From a business perspective, initial fraud alerts can support companies to avoid accepting loan and credit applications from fraudsters posing as genuine account holders. This protects the businesses from losing out to the fraudsters, as well as protecting their customers whose identities have been stolen.

This is one strand of many when it comes to how modern businesses need to fight fraud. Fraud fighting measures differ between companies and industries, but a core approach of using intelligent insights, machine learning, digital fingerprinting, and more, means that the latest next-generation fraud fighting solutions can serve a wide range of needs.

SEON is one such example. By enabling businesses to implement frictionless Know Your Customer (KYC) verification and AML fraud detection processes, the platform can uncover fraud patterns and discover revenue opportunities across a wide range of settings.