What Is Synthetic Identity Fraud?

People who don’t exist held $355 million in outstanding credit card balances last year. So-called synthetic identity fraud is one of the fastest growing types of credit-related crimes, increasing eightfold since 2012, according to TransUnion.

While this represents a small part of the estimated $16.8 billion in annual identity theft losses, the share is growing.

Known as synthetic-identity fraud, it’s almost like the credit industry’s version of antibiotic resistant viruses: Criminals have developed craftier methods in an attempt to get around the defensive measures used by card issuers.

Synthetic-identity fraud occurs when a criminal creates a fictional identity from scratch – complete with a made-up Social Security number – or uses one snippet of real information such as a child’s stolen Social Security number and fabricates the rest.

Once the identity gains credibility, thieves can rack up charges without fear of discovery by a legitimate account holder. Creditors will eventually crack down on the overdrawn and overdue accounts – but there is no legitimate account holder to hold responsible.

How does a completely made-up identity get legitimacy? Criminals take advantage of seams in the credit application system. When an unknown applicant applies for a source of credit, a new credit file is created.

Creating Fake Credit Files

Without a credit history to go with that file, the lender is likely to deny the application – but the creation of the credit file alone provides a basis for future legitimacy.

The scammer simply applies for more credit, targeting sources that are tolerant of limited credit histories. As more applications are received, the credit file grows. Lenders can become convinced that the applicant is a real person with no credit history.

All it takes is one approved application to convert the credit file into a credit report. The approved use will probably be for a credit-building card with a relatively low limit.

Raising the Limits

Fraudsters make legitimate purchases and pay them off in order to get higher limits before maxing out the card. An instantaneous means of cross-checking Social Security numbers would prevent synthetic fraud. Unfortunately, no such method exists currently.

Ironically, the Social Security Administration (SSA) accelerated the problem with a policy designed to reduce identity theft. Prior to 2011, Social Security numbers were issued in a pattern relating the first several digits to the assignee’s zip code.

The SSA switched to random numbers, hoping to stop scammers from hacking numbers using information available through public sources.

No Quick Way to Verify

Randomization does make it difficult for scammers to reconstruct a Social Security number – but it also gives the SSA no quick way to verify that a Social Security number has been issued and who the recipient was. Banks must sift through enormous amounts of information to spot synthetic fraud.

You can’t do anything to stop synthetic-identity fraud, but you can make it more difficult for a thief to make off with your identity.

Protect your information and check your accounts regularly. Make it so difficult a criminal would rather make up new identities than try to steal yours.

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