If identity thieves have been opening up lines of credit in your name, a credit freeze can be a way to shut them down.
With 7.7 million Americans hit by credit and debit card fraud in 2011, according to Javelin Strategy and Research, it might be a solution many are looking into. But before putting your credit on ice, it’s important to know the consequences.
What is a credit freeze?
Also known as a “security freeze,” a credit freeze involves writing to the credit bureaus and asking them to lock down your credit, preventing lenders from opening new lines in your name. That way, if a thief applies for credit, the lender hits a wall when accessing your credit reports, and the application goes no further.
If you’ve been a victim of identity theft, you can get a freeze for free in most states. Otherwise, you’ll have to pay between $5 and $10. Fees also apply (and vary by state) for each add, lift and removal of a freeze. For details on how to freeze your credit, visit the websites of all three credit rating bureaus: Experian, Equifax and TransUnion.
Credit freezes are not widely used, says Steve Axtell, a credit counselor with American Financial Solutions in Seattle
“I’ve been doing this for six-and-a-half years or so and for the first time last week, I pulled a credit report last week [and found] the information was frozen. I don’t know that it’s even widely known,” he says.
Disadvantages of freezing your credit
Although a credit freeze won’t affect your credit score, there are some drawbacks.
One is the cost. Think about all the times you might need to give others access to your credit — applying for a job, getting a credit card, trying to qualify for or refinance a mortgage, or getting a cellphone. If you have a freeze on your report, you may have to pay each of the reporting agencies to thaw the report each time you want to apply for a job or service.
States, rather than the federal government, make the rules on credit freezes, and some states will specify a fee to reinstate the freeze as well. Some creditors will let you know which reporting agency they use so you only have to pay to lift the freeze at one agency, but for major purchases, such as a car or home, they may check all three. When you do want to lift the freeze, you can open the information to everyone or limit the lift for just a specific lender.
Axtell says another downside involves the time it takes to lift the block. If you’ve frozen your credit and a potential employer wants to check your credit, you may run into a delay, which is not a plus when competition for jobs is fierce.
Thawing credit can take anywhere from hours to days, so it’s important to plan for the wait if someone will need to access your credit.
Freezes have limits
There are a few things the freeze won’t stop, says Michele Cacdac-Jones, a senior director at Equifax. Companies you’re currently doing business with — say a mortgage company or a credit card or cellphone company — will still have access to your information.
A freeze also won’t stop aggressive calls from creditors who want the money you already owe them. Government entities and law enforcement agencies also still have access to your information, as do private investigators.
One other person still has access to all your records, Cacdac-Jones says: you. Even with a security freeze in place, consumers will still have the usual access to their free annual credit reports through AnnualCreditReport.com.
Who should get a credit freeze?
Credit freezes aren’t for everyone. Yet it makes sense for some groups, says Paul Stephens, director of policy and advocacy for the Privacy Rights Clearinghouse.
Senior citizens: Generally people who are older and established are less likely to be looking for jobs, applying for mortgages, changing insurance or trying to get car loans.
“They are ideally suited for a security freeze,” Stephens says.
Younger people, though, will run into more complications because they often need services that require quick access to credit.
People involved in family disputes: Stephens recommends a security freeze for people who “are in a contentious familial relationship.” Some examples include divorce, custody disputes or break-ups.
“You’re typically going to be in a situation where both individuals have a tremendous amount of information about each other including their Social Security number,” Stephens says. “People may have filed joint tax returns. It does present an ideal opportunity if one of the individuals is so inclined, to commit identity theft against the other.”
A child who shares your account: Children generally shouldn’t have credit files before age 18. Yet some do because they are authorized users on an adult’s credit card account. A credit freeze may be one tool to prevent identity theft, which is particularly high among children. A 2011 Carnegie Mellon study of more than 40,000 children’s identity records found that 10.2 percent of the of the children in the report had someone else using their Social Security number, which was 51 times higher than the 0.2 percent rate for adults in the same population.
Rod Griffin, public education director for Experian, says freezes can be done separately on a child’s file without freezing the parent’s credit.
People who have been ID theft victims: In this case, costs are typically waived for freezing and thawing credit reports, as long as proof – such as a police report – is provided.
Griffin warns that credit freezes don’t protect against one of the main contributors to ID theft: dumpster diving (when thieves root through your trash in search of personal information). In other words, a credit freeze won’t prevent thieves from swiping your personal data and using it to forge documents and hack your accounts. It will only stop them from opening new accounts.
There are two alternatives for people who feel vulnerable but don’t want to freeze their credit — fraud alerts and credit monitoring.
“The fact is, neither of those two options will provide the type of protection that a credit freeze will provide,” Stephens says. “A fraud alert basically puts a red flag on your credit report, but it really doesn’t do more than that. Then it’s up to the creditor to determine how they’re going to handle that red flag.”
Griffin notes the Fair and Accurate Credit Transactions Act (FACTA) requires that, if there’s a fraud alert on your file, any business that is asked to extend credit to you must contact you at a telephone number you provide or take other “reasonable steps” to see that the credit application was not made by an identity thief.
Stephens says the ambiguity lies in that “reasonable steps” clause. Although potential creditors should take extra precautions, they don’t always do so.
Moreover, a fraud alert lasts only 90 days. You have to renew it at that time and that step is often forgotten, Stephens says.
With credit monitoring, you’re generally going to pay for it, and it could be costly — often more than $100 per year, Stephens says. Also, the monitoring system notifies you only after your information has been compromised.
“That’s the huge advantage of a credit freeze — it cuts off the ability of somebody to apply for credit in your name,” Stephens says. “With credit monitoring you’ll find out after the fact and you’ll still have to repair the damage, although, presumably because you’ve been notified early, the damage won’t be as great.”