Which Protects You Better: a Credit Freeze or Credit Monitoring?

Your gym locker has a combination why not your credit report?

You may be surprised to know that, by default, something as important as your credit report at Experian, Equifax, or TransUnion is NOT secured with a PIN or password. So, what can you do to protect this information?

You probably already realize just how important your credit report really is. It contains payment history and loan information for accounts you presently have. More importantly, it’s typically consulted before new credit in granted in your name.

However, hacking and data breaches happen with disturbing frequency. For example, Yahoo, Target, and even the Federal Governments Office of Personnel Management have all been victims. When names, addresses, birthdays, credit card numbers, passwords, social security numbers, and security challenge answers are lost to hackers, consumers become at-risk for identity theft. After an ID thief opens up accounts in a victim’s name, undoing the mess can be expensive and take years!

What Can You Do?

The three credit reporting agencies promote a combination of services which include credit report locking, monitoring, and ID theft-related services. These run in the range of $10-$30/month. There is, however, an effective solution that will lock your credit reports. It doesn't require a monthly subscription and simply involves a one-time expense. It's called a security freeze.

Related: Credit Score vs Credit Report

This freeze locks your credit report with a PIN/Password, preventing it from being furnished to prospective lenders when an ID thief attempts to apply for credit in your name. There is a fee to initially lock all three reports, but that's the only investment for this safeguard. Then, you'll pay a smaller fee to unlock them each time a credit report is needed. Otherwise, they stay locked and secured.

But why would you go this route, rather than constantly monitoring your credit for changes? Are you adding unnecessary risk just to save a little bit of money?

Security Freeze vs. Fraud Alert vs. Credit Monitoring

Let's look at the difference between the three and how they can each help you.

Credit Freeze

A security freeze will essentially put a lock on your credit report, so that lenders cannot access the information in response to a credit application. This is helpful if you’re not actually the one applying for new credit!

A separate security freeze is required for each of the 3 credit reporting agencies. Depending on the state in which you live, the fee might be waived if you’re over a certain age, or have been the victim of identity theft. When the fee is not waived, it is typically between $5 and $10 per freeze.

Resource: 12 Cards That Offer Credit Scores for Free

When a freeze is established on your credit file, you are given a Personal Identification Number (PIN) which is required in order to lift the freeze. Keep this in a safe place!

According to the Federal Trade Commission, a security freeze will not affect your FICO credit score or prevent pre-screened credit offers. Also, note that your report can still be automatically released to your existing creditors or to debt collectors acting on their behalf.

How to place a Credit Freeze

You must apply for a security free separately, for each of the 3 credit bureaus. Here’s how to place a freeze through TransUnion, here are the instructions for Experian, and here’s info on Equifax.

Lifting a Credit Freeze

A security freeze not only prevents ID thieves from pulling a credit report, but also prevents you from having one pulled when you apply for credit. For example, you will need to lift the security freeze when you apply for a mortgage, car loan, credit card, switch cell phone providers, etc. Sure, this is an added step anytime you need to add an account or credit-based service, but it’s well worth the extra effort in my opinion.

Avoid lifting all 3 locks unnecessarily

When applying for credit, ask the lender which bureau will be used to check your credit. Don’t spend the time and money to unlock 3 credit reports if only one will be consulted.

In my experience, when I ask a vendor which report will be consulted for my transaction, I often get a non-answer like, We consult all three. I then ask to be transferred to their credit department to grill them on which report will most likely be requested. Once they finally spill, I’ll unlock just that one report. If worse comes to worse and they absolutely will not tell you, you should unlock all three. But certainly, try to find out first, and save yourself some cash.

Fraud Alerts

The FTC also says that if you know you have been the victim of identity theft, you may contact one of the three credit bureaus and have a Fraud Alert placed on your credit file for free. Typically, this means a message is added to your credit report asking lenders to contact you at a certain phone number to confirm identity before granting credit.

The designated credit reporting agency is also supposed to contact the other two bureaus on your behalf. The fraud alert remains on your files for 90 days although it may be renewed.

In my opinion, this is a terrible idea because you never know when an ID thief will attempt to open credit in your name. Even if you knew exactly when your personal details were compromised in a breach, it doesn’t mean your details will be exploited right away. Hacked information can remain in black market databases for years before being sold to cybercrooks. Trying to time a 90-day protection window to when you think an ID thief will exploit it is as silly as wearing a seatbelt in your car only on the day you think you’ll be involved in a crash.

Resource: How to Correct an Error on Your Credit Report

About 10 years ago, I placed a fraud alert on my credit files and found that sometimes lenders did not contact me as required to verify identity. Having now tried both, I very much recommend a security freeze over a fraud alert.

Credit Monitoring

Each of the three credit bureaus offers basic credit monitoring and identity theft protection services on a subscription basis. These services range in price from $10 to $30/month.

Some offer the ability to lock and unlock credit reports and some are monitoring-only services. Some of the plans also add insurance or assistance if your identity is stolen.

Be Proactive Versus Reactive

In my opinion, locking the credit file with a PIN is your best option. At the very least, its much better than leaving it unlocked and being notified AFTER someone fraudulently opens credit in your name. Therefore, I recommend locking credit reports over simply monitoring-only solutions.

Locks Are Great, But Still Check Free Annual Reports

Even if a cyber crook didn’t open up an account in your name, your credit report might still contain errors and erroneous information. Therefore, it’s best to obtain your credit report each year -- everyone gets it for free every 12 months.

A simple Google search for free credit report will yield countless offers and scams. You have a number of legitimate options to choose from, though my personal favorite is AnnualCreditReport.com. Its the official, truly free solution mandated by federal law:

Learn More: AnnualCreditReport.com versus FreeCreditReport.com

Identity Theft

For victims of identity theft, the Federal Trade Commission has a list of steps that should be taken. If you believe your identity has been compromised, you should start here.

Final Thoughts

The idea of identity theft is scary, at the very least. However, being proactive will reduce your chances of a thief utilizing your credit for their own benefit -- possibly creating an expensive headache that could take years to fix.

To summarize, here are my thoughts on protecting your own report:

1. Locking each of your 3 credit reports is an easy, cost-effective way to prevent them from being used by ID thieves.
2. Credit monitoring is not a good alternative to locking credit reports with a PIN/password.

Staying one step ahead will give you peace of mind and, should the situation ever arise, protect you from theft.

Has your credit ever been used fraudulently? Were you actively monitoring your credit or was it caught by accident?