When to Freeze or Thaw Your Credit

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The old trick of placing your credit card in water and freezing it into an ice cube is one way some people opt to prevent themselves from running up credit card debt. However, if you're more concerned about someone else using your credit profile to line their pockets, freezing your entire credit report could be a better choice.

Recent data breaches at Target (TGT), Home Depot (HD) and Anthem (ANTM) have created concern among consumers about their vulnerability to identity theft and how to protect their financial and medical information. While stopping shopping and eliminating your use of identifying information is an impractical reaction to ID theft, limiting your exposure at the credit reporting level might be a wise idea for some.

All three credit reporting bureaus -- TransUnion, Experian and Equifax (EFX) -- offer consumers protection through credit monitoring, fraud alerts, and credit or security freezes. The option you choose could be free (as is the case for a fraud alert, which is simply a statement attached to your credit report that says you believe you are a fraud victim) or can cost you several hundred dollars a year.

%VIRTUAL-pullquote-Freezing your credit report is one tool consumers can use to protect themselves, but it is an extreme measure and not as great as it sounds on the surface.%"Credit monitoring alerts you when an account has been opened in your name so you can contact the company if the account isn't yours," says Ken Chaplin, senior vice president at TransUnion. "Putting a freeze on your report means that no one can open a new account at all -- not even you."

Chaplin says that a credit freeze prevents unauthorized new activity on your credit report, such as a credit inquiry for a new credit card or loan. However, it doesn't stop someone who already has your credit card or bank account information from using that information to commit fraud on those open accounts.

Freezing your credit limits access by potential creditors to your credit report, but it may not be the ideal solution for every scenario.

"Freezing your credit report is one tool consumers can use to protect themselves, but it is an extreme measure and not as great as it sounds on the surface," says Rod Griffin, director of public education for Experian. "First of all, it doesn't prevent identity theft; it just reduces the ability of someone to use your stolen identity to open new lines of credit. Consumers need to understand that ID theft isn't the same as credit fraud. Credit fraud is just one symptom of ID theft."

Griffin points out that the need for access to your credit report is more ubiquitous than people realize.

"Anyone who is actively involved in the credit marketplace will need their credit report available, such as when you buy a new cell phone, apply for a retail store credit card for the instant discount, or set up phone or utility services in a new apartment," he says. "If you know ahead of time that you're applying for new credit, then you can have the freeze lifted, but that often requires an additional fee and can take time."

How to Freeze Your Credit

If you've been a victim of identity theft and can produce valid identification, by law you are permitted to request a free security freeze on your credit report. If you are attempting to prevent a criminal from opening accounts in your name but have not been victimized, the amount you will be charged varies by state law.

"The fee to set up a security freeze varies, but it's typically around $10," says Griffin. "While that doesn't sound like much, it actually can add up quickly because you need to pay separately for your credit report to be frozen with each of the three credit reporting bureaus. You also have to pay each credit reporting bureau to lift your freeze, so that adds up to about $60 right there. You can reinstate the freeze once for free, but if you needed to lift it again that would be another $30."

When you freeze your credit, you must provide identification to the credit bureau, and typically you're provided with a personal identification number, or PIN, that can make it easier to "thaw" your credit report when you want someone to be able to review it. Griffin says with the PIN it can take as little as a few hours to lift your freeze, but without a PIN it could take several days.

Freezing your credit still allows for current account holders to check your credit report and for you to use your credit accounts. You just won't be able to open new accounts without thawing your credit report.

Freezing Your Credit with an App

Both Experian and Equifax offer credit or security freezing services that can be activated online, by mail or by phone, but TransUnion recently introduced an instant, app-based credit freezing capability called Credit Lock as part of their credit monitoring service.

"Consumers can download the app, log in and swipe right to lock their credit and swipe left to unlock it," says Chaplin. "This eliminates the lag time that usually makes freezing your credit cumbersome and puts the power back in consumers' hands."

The app is a free benefit for consumers who purchase the TransUnion credit monitoring service for a monthly fee of $17.95, says Chaplin.

Alternative Protection Mechanisms

All three credit reporting bureaus offer credit monitoring systems for a monthly fee that offer unlimited access to your credit report and alerts to any unusual activity on your report, which they say provide a more thorough level of protection against ID theft since they monitor your current accounts as well as new accounts.

"If you are a victim of an ongoing ID theft scheme, then freezing your credit report makes sense," says Griffin. "If you are extremely concerned about someone gaining access to your credit report, then it's probably worth putting up with the potential day-to-day hassles of a credit freeze. But for most people, this is an extreme step that won't necessarily prevent fraud."

Motley Fool contributor Michele Lerner has no position in any stocks mentioned. The Motley Fool recommends Anthem. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.
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