Free Credit Scores Aren't Enough: We Need Credit Monitoring

Two surveillance cameras and credit card
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President Obama has announced that he's taking steps to safeguard our privacy. But, when it comes to our finances, that apparently entails providing free credit scores to customers of Chase (JPM) and Bank of America (BAC) and notifying people when they've been involved in a data breach. That's it, and that's a big mistake.

You see, while the White House refers to credit scores as "one of the best early indicators of identity theft," the truth is that fraud can take quite a long time to manifest itself in your credit score. And, when your score ultimately does get hit, not only will it be difficult to pinpoint the exact cause, but the damage will already have been done.

What Obama Should Have Proposed

Obama should have proposed legislation that would provide both free ongoing credit report access and monitoring to all consumers.

All credit scores are based on the information in major credit reports. Signs of identity theft -- such as fraudulent trade lines or change of address notifications -- would therefore show up in your credit bureau files as soon as identity theft rears its ugly head.

Credit bureaus are also renowned for making mistakes. The most reliable estimates show that one in five people have an error in one of their credit reports. But while the credit bureaus are the ones commandeering and misconstruing our financial data, it is our responsibility to monitor the credit bureaus' performance. And we're given one crack at each report per year. That doesn't seem quite fair, now does it?

Consumers Are Too Busy

"The solution we have currently -- monitor your credit -- is insufficient because consumers only have access to one free credit report per year under federal law," says Neil M. Richards, a professor at the Washington University School of Law. "And even if consumers check their credit regularly, this competes with other kinds of privacy self-management they are expected to keep up with. ... We place too many demands on busy individuals, so it's no surprise that everyone can't keep up with everything they are expected to do."

Complimentary ongoing credit monitoring -- a service that is not currently available -- would pay dividends in different areas. Credit bureaus would be conditioned to make fewer mistakes, which would lead to more predictive credit scores, more sound underwriting and a safer lending landscape. Consumers would also be able to track their financial progress and optimize their financial performance. Everybody wins.

As things currently stand, however, the best things that we can do are to regularly review our financial accounts and take commonsense steps to protect ourselves against fraud. That means double-checking your monthly bank and credit card statements, downloading and digesting one of your three major credit reports once every four months, and doing things like shredding financial documents, locking your mailbox, changing your passwords, and being careful about how you transmit financial information online.

And, if you ever suspect that you've fallen victim to identity theft, contact your financial institutions as well as the Federal Trade Commission. While it might be a pain to sort out, the good news is that you won't be held liable for unauthorized transactions made with your accounts.

Odysseas Papadimitriou is CEO of the credit card comparison website CardHub and the personal finance social network WalletHub.
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