From a consumer perspective, a red flag is a warning that something suspicious or negative may have happened on an individual's credit report. This may be a sign of fraudulent activity. Creditors have to follow the FTC's Red Flags Rule to try to identify, manage and avoid these flags. They may also use their own red flag system to assess the risk of giving credit to consumers.
Common Meaning
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A red flag can be a sign of various problems, including identity theft. It may show a new account that the consumer did not authorize or an inquiry from a company that does not have authorization. Even an incorrect address might be a potential red flag. In 2008, the FTC set up the Red Flag Rule to give consumers better protection from identity theft and related problems. Under this rule, creditors produce written reports outlining the types of red flags that may occur in their businesses now and in the future. They must establish programs to detect these flags and to manage the actions they take when a flag occurs.
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Fraud Alert
The consumer who has had past issues with identity theft can call all credit bureaus to ask a representative to add a fraud alert or warning to his credit report. With a fraud alert, all potential creditors must call the consumer at the phone number listed on the credit report before opening a new credit account. This helps eliminate potential issues with credit report red flags in the future. The consumer can set a fraud alert for about 90 days or up to seven years.
Another Meaning
Another potential meaning for a red flag in regard to credit is when a potential creditor sees negative information on a credit report that could indicate a problem. In this case, it's a warning to the creditor that the consumer could pose a risk. For instance, a series of sudden late payments is a red flag, as is a flurry of hard credit inquiries. A hard credit inquiry is an application to open a new credit line or loan. Another possible red flag is a customer who is nearing or exceeding his credit line limits.
Suggestions
To avoid problems with red flags, order a copy of your credit report regularly—once every 12 months. Get a credit monitoring service if possible that will contact you whenever a new account is listed on your report. If you notice any strange activity, report it to the credit bureau immediately for resolution.