Credit Freeze – What, How, Why, and Other Things to Consider

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In Personal Finance ResourcesLendKey

Identity theft is one of the biggest concerns in the modern world – especially given the relatively recent high-profile breaches.

If you have had your identity stolen, getting it back can be a nightmare. Even if you have not, then the fear of somebody racking up thousands of dollars of debt in your name can be paralyzing. Because of this, some experts are suggesting freezing your credit as an effective way to protect yourself from identity theft.

What is freezing your credit?

If you freeze your credit, you prevent anyone other than you and your existing creditors from accessing your credit score and history. (Government agencies can also bypass the freeze, but only if they have a court order, subpoena, or warrant). This means that new lenders will not approve a new account in your name, essentially preventing thieves from using your personal information to open a new line of credit.

The downside is that it also prevents you from opening a new line of credit unless you have the freeze lifted.

Freezing your credit does not stop you from getting those annoying prescreened credit offers in the mail and does not stop you from getting your credit report or a lender from getting your credit report for you – some credit card companies will automatically send you your credit report every year.

How do you freeze your credit?

You freeze your credit by contacting the three national credit reporting companies – Equifax, Experian, and TransUnion. There is a small fee for freezing your credit – unless you have been a victim of identity theft, in which case you will be permitted to do so for free. You do need to freeze your credit with all three bureaus – or a thief will just go to the others. You will be sent a confirmation letter with a PIN or password – do not lose this as you can’t lift the freeze without it.

When you need to apply for a job or a mortgage, open a new card, or otherwise open a line of credit you will need to thaw your credit. You can do this either for a period of time or for a specific company. Like freezing, thawing credit costs a small fee. They have to lift the freeze within three days. Ask what company the business intends to use to check your credit – that way you can lift the freeze only with that company and save a bit of money.

In most states, credit freezes remain in place until you ask the company to lift them. In a few states, they expire automatically after seven years – check the laws in your state. Most states set the fees for freezing and thawing credit by law, so the exact cost will depend on your state. A few states – South Carolina, North Carolina, Maine and Colorado, do not allow fees to be charged at all for freezing or thawing credit. The fees are, in any case, generally low and should not discourage most people from freezing their credit.

Freezing your credit has no effect on your credit score and does not affect how your score might be changed by your actions.

Why freeze your credit?

You should consider freezing your credit if you have been a victim of identity theft. You should also consider discussing it with elderly relatives (who are more often targets of fraud due to the fact that they are perceived to be easy marks).

A lot of people froze their credit after the Equifax breach (so many, in fact, that the Equifax website crashed repeatedly and their phone lines jammed). It may also be worth freezing your credit if you have reason to believe your personal information has been compromised, either as a permanent thing or as a temporary measure. If, for example, you know your social security number has got into the hands of somebody who does not have a legitimate reason to need it, you should consider freezing your credit.

Why not freeze your credit?

Some experts recommend that everyone freeze their credit. However, there are some good reasons not to do so.

The first is if you are shopping for a house, a new car, or a new loan. Or if you have a child approaching college who may need you to co-sign their lease or student loans. Basically, if you know a number of people are going to need access to your credit score, it is probably not a good time to freeze your credit. It is also not a good idea if you are seeing the writing on the wall at work and fear you may have to look for a new job soon.

When you freeze your credit you get a PIN. If you lose that PIN, then it can make getting your credit unfrozen much more complicated – the company will require you to jump through all kinds of hoops to prove your identity. On the other hand, if a thief gets hold of the PIN, they may be able to unfreeze your credit, get a loan and then freeze it again – without you knowing until you get the bill for thawing your credit. This makes them another target for a breach – yet another piece of information that could potentially be compromised.

The final reason is that freezing your credit does nothing to prevent the most common form of credit card fraud – a thief simply taking and using your existing credit card number. In 2016, according to the Consumer Sentinel Network, the most common cause of credit card fraud was giving out your credit card number to a scammer over the phone. Card cloning is another common problem – a copy of the information on the card being taken using a fake scanner when you pay for something. Chip cards reduce this form of fraud substantially by making the information on the card more secure.

In other words, although freezing your credit score might be a good idea, it may also be too much of a pain.

What Alternatives Are There?

As an alternative to a credit freeze, all three companies offer a credit lock – where you simply have to log in to release the score to a potential lender or employer. This gives less protection than a freeze but is also a lot less annoying. However, you have to lock with all three bureaus. Both Experian and TransUnion bundle the lock with other features, and Experian provides it only in conjunction with identity theft insurance for $9.99 a month – considerably more expensive for a freeze unless you need to unthaw your credit a lot.

Another option often touted is identity theft insurance. For $25 to $60 a year, you can get insurance which covers you for the costs of dealing with identity theft – such as lost wages and legal bills. However, the vast majority of identity theft victims don’t incur any significant out of pocket costs, making ID theft insurance a waste of money for most people.

Of course, the best way to prevent identity theft is to practice good “financial hygiene.” Although there are no guarantees, if you follow certain best practices you can reduce your risk. Here are some tips:

  1. Use strong passwords, especially on banking sites, and do not use your online banking password for any other services. If you have problems remembering passwords, use a password manager.
  2. Lie when setting up security questions, especially the infamous ‘mother’s maiden name.’ In the modern world, any idiot can find out your mother’s maiden name (if she even changed her name when she got married).
  3. Shred or rip up mail and financial documents, including prescreened credit card offers, so thieves cannot go through your mail and find them.
  4. Never give your credit card number out over the phone to somebody who called you out of the blue. (Note: The IRS never calls people to ask them for money). Never send your credit card number through email. Use a secure site to buy things if possible. If you must give the number out over the phone, either call the company yourself or make arrangements through email for them to call you at a specific time.
  5. Check your credit score regularly for unusual changes and always check credit card statements. The good news is that credit card companies are very good, these days, at spotting unusual transactions – if you are a victim of fraud chances are they will call you.

So, should you freeze your credit? The answer really depends. If you are not planning on changing jobs or moving any time soon if you do not need to take out a loan in the immediate future, and if you feel you need the extra protection, then freezing your credit may be a good idea. If your basic identity (social security number, etc) has been compromised, then you definitely want to freeze your credit at least for a period of time.

However, if your life circumstances are such that you know you are going to need to take out a loan, change jobs, have a kid leaving home, etc, then freezing your credit is likely to be more trouble than it is worth.

Finally, remember that freezing your credit only protects you from certain kinds of fraud and even if you do have a freeze in place, you still need to take other steps to keep your money safe.

Contact LendKey for more information.

Sources:

www.nerdwallet.com/blog/finance/pros-and-cons-freezing-credit

www.consumer.ftc.gov/articles/0497-credit-freeze-faqs

www.money.cnn.com/2017/09/12/pf/what-is-a-credit-freeze/index.html

www.huffingtonpost.com/entry/heres-why-you-probably-dont-want-to-freeze-your-credit_us_

www.nerdwallet.com/blog/finance/credit-lock-and-credit-freeze

www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-january-december-2016

www.marketwatch.com/story/is-identity-theft-insurance-a-waste-of-money-2014-03-31

www.money.usnews.com/money/personal-finance/family-finance/articles/how-to-protect-yourself-from-identity-theft