Fraudulent credit activities are increasing, resulting in significant financial losses for both lenders and consumers. TransUnion has introduced a solution to combat credit washing—a scam where criminals erase legitimate negative credit information temporarily to enhance their credit scores and acquire loans they do not intend to repay.

In this fraud method, criminals dispute accurate negative data on credit reports, leading to temporary score boosts that enable them to secure auto loans, credit cards, or other forms of financing. Eventually, these loans may lead to financial losses for lenders and businesses.

A Potential Solution

According to TransUnion, such fraudulent schemes have been on the rise over the past few years. Approximately 5% of U.S. consumers experienced charge-off account suppression due to atypical reasons within this year. They estimate that by the end of the year, $10 billion in debt will be removed from credit reports.

TransUnion’s solution involves directing suspicious consumers for manual review, thus lowering early charge-offs. The Credit Washing Default Score helps identify consumers with a history of such suppression who are at higher risk of defaulting on new accounts within the next 12 months. Additionally, this product includes algorithms that monitor changes in reported charge-offs across various business lines, including auto loans and bank cards.

A Disappointing Consequence

Credit washing can occur due to the Fair Credit Reporting Act (FCRA), which was designed to assist victims of identity theft. Per FCRA rules, financial institutions and credit bureaus are required to block affected account impacts for four days while investigating a reported fraud claim. While claims may be denied or later rescinded if proven false, it can be challenging within the limited timeframe.

“The complexity in distinguishing first-party fraud from genuine identity theft makes credit washing particularly problematic,” stated Suzanne Sando, Lead Analyst of Fraud Management at Javelin Strategy & Research. “Without robust fraud detection measures to accurately assess and analyze relevant signals, these claims often get approved, and the negative marks are removed, allowing credit scores to rise sufficiently for fraudulent loans to proceed. This exposes another way consumers have exploited the system without being caught.”