All of us are potential victims of identity theft, as we discussed in the first part of this article. According to a study the Department of Justice released earlier this year, more than 3.6 million American households suffered from identity theft during a six-month period in 2004. Even if you do everything you can to safeguard your personal information, identity thieves can get information about you in other ways, such as by obtaining records from government agencies or private businesses. You need to be prepared to respond if identity thieves strike you and your family.

The Fair and Accurate Credit Transactions Act (FACT), enacted in 2003, not only gives you the right to receive vital information about your credit history but also provides safeguards and procedures for you to follow if you're victimized by fraud or find mistakes on your credit report. Given the importance of credit and the many different ways your credit history affects your financial and personal affairs, correcting mistakes can save you money and also give you opportunities that otherwise might remain closed to you.

Responding to identity theft and fraudulent transactions
If you find unauthorized transactions on your credit card or other financial accounts, FACT gives you several ways to proceed. The first thing you should do is contact either Experian, TransUnion, or Equifax (NYSE:EFX), the three major credit-reporting companies. Each of these companies allows you to place a fraud alert on your credit history, to inform potential creditors who of the possibility of credit fraud. In response, potential creditors must contact you personally if you provide a telephone number and must take reasonable steps to confirm that any credit application or request has come from you rather than from someone who has stolen your identity. Although it used to be necessary to call all three companies to ensure that you were completely protected, they all now communicate among themselves, and so one phone call can take care of putting a fraud alert on all three of your credit reports. Fraud alerts remain on your credit report for 90 days.

In addition to fraud alerts for those who have already been victimized, FACT allows military personnel to report when they're on active duty. Members of the military are particularly susceptible to identity theft, because they often move from one location to another, and those on active duty overseas may not even have access to their credit histories for months or years at a time. Military active-duty alerts stay on a credit report for 12 months.

How financial institutions have to help
As well as giving rights to identity-theft victims, FACT also forces financial institutions to come up with ways of detecting potential fraud and preventing it before it happens. However, the government agencies tasked with creating specific regulations have not yet done so. Yet it's clear that many identity-theft problems are beyond the consumer's control and that the financial institutions themselves must address them. For example, if you move and a credit card company mistakenly uses your old address to send you an application, the door is wide open to the next occupant to steal your identity. With cash advance checks and other quick-money offers, you just can't act fast enough to stop everything on your own.

One way that many identity-theft victims first find out about a fraudulent debt is when they get a message from a collection agency. FACT requires that a collection agency give you any information it has about the fraudulent debt, including account applications and statements. Once you inform a creditor that a debt resulted from identity theft, the creditor cannot use a collection agency against you.

FACT also requires creditors to give you written notice if they submit negative reports to a credit-reporting company. If a bad credit history leads a creditor to offer you credit only at higher rates, the creditor has to let you know of that assessment. Furthermore, FACT requires that credit card receipts no longer include your full account number but rather just some of its final digits. Similarly, when obtaining a credit report, you can ask that your full Social Security number not be included.

Correcting mistakes on your credit report
If you find a mistake on your credit report, FACT gives you a couple of options. Before FACT became law, you generally had to dispute the mistake directly with the credit reporting company. However, FACT also allows you to communicate directly with certain creditors that are also financial institutions. Once you alert the creditor to the mistake, the creditor must conduct an investigation and isn't allowed to add negative reports to your credit history until the investigation is complete. If you disagree with the results of the investigation, you are allowed to submit a 100-word explanation that must be included in your credit file at the credit reporting company.

The Fair Credit Reporting Act also gives you legal remedies if your rights under FACT are violated. You can file suit, lodge a complaint with the Federal Trade Commission or your state attorney general, or both. While this is usually a drastic step to consider taking, when all else fails, the threat of litigation may convince a creditor that you are serious about fixing a mistake on your credit report.

The Fair and Accurate Credit Transactions Act empowers you to take an active role in managing and safeguarding your credit. By giving you access to information and the right to receive assistance from financial institutions and other creditors, FACT is a step forward in the ongoing battle against identity theft and credit card fraud.

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Fool contributor Dan Caplinger found his credit report to be fascinating reading. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy never turns you down.