Is it time for you to order a credit freeze? In the wake of the Equifax data breach, perhaps. But be warned: A credit freeze could complicate your life if you apply for a mortgage loan.
The big data breach suffered by national credit bureau Equifax has certainly awaken consumers to the risks of collecting credit information. After all, Equifax's breach exposed the financial information of more than 143 million customers.
A credit freeze can help protect you if identity thieves obtain your financial information through data breaches. That’s because freezing your credit prevents lenders or financial institutions from accessing your credit reports. Freezing your credit can also keep identity thieves from opening accounts or acquiring credit in your name, even if they have gained access to your financial information.
It’s why legal- and identity theft experts say that credit freezes are the best form of protection for consumers whose personal information has been compromised. Other forms of protection, such as fraud alerts issued by the credit bureaus, are not nearly as effective, these experts say.
The best form of protection
"The single most effective thing people can do to protect themselves from identity theft is to freeze their credit reports," said Steven Weisman, an Amherst, Massachusetts-based lawyer who teaches a course on white collar crime at Bentley University. "In the wake of the massive data breach at Equifax, the question is not if these people were targeted for identity theft, but when."
As Weisman says, those whose data was exposed can't change their Social Security numbers – except in extreme circumstances -- and they can't change their birth dates. Armed with this information, thieves can try to steal these people's identities. Their only stumbling block? They need access to your credit report if they want to open credit accounts or take out loans in your name.
A credit freeze will prevent this. Weisman says that a freeze is the most important step people can take to protect themselves.
"Fraud alerts, which have been often touted by the credit reporting agencies, will not protect you and are often ignored by those granting credit," Weisman said. "There is no penalty for someone ignoring a credit alert and granting credit in your name."
The downside? If you need to apply for new credit or a new loan, such as a mortgage or home improvement loan, credit freezes can complicate your life. Here's what you need to know about credit freezes, how they protect you and how they can add extra work to the process of applying for a home loan.
How credit freezes work
Ordering a credit freeze prevents any of your financial information from being reported to lenders or creditors. This matters if you want to protect yourself from identity theft. Any time someone tries to use your personal information to open a new loan or credit card in your name, the freeze ensures that the applications they filed will be automatically rejected.
Ordering a freeze isn't complicated, but it's not free. And to truly protect yourself, you'll have to do it three times.
First, know that you can't just freeze your credit with one of the national credit bureaus. There are three of them, Equifax, TransUnion and Experian. To truly keep your financial information out of the hands of thieves, you'll have to order credit freezes with each of these bureaus.
You can order your freezes at the online freeze pages run by each bureau, TransUnion, Equifax and Experian. If you prefer to speak to an agent, you can call the bureaus to request a credit freeze. You can reach Equifax at 1-800-685-1111, TransUnion at 1-888-909-8872 and Experian at 1-888-397-3742.
How much you'll have to pay for a freeze varies depending on your state. In general, you can expect to pay from $3 to $10. You can waive this fee if you can prove that you've already been the victim of identity theft. The proof for this has to come in the form of an incident or police report stating that you have indeed been victimized by an identity thief.
Melting a freeze
Your freeze can remain in place for as long as you'd like. But you probably don't want an indefinite freeze. That's because mortgage lenders when you apply for a mortgage will need to check your credit reports and your three-digit FICO credit score. You need to allow these financial institutions to access your credit if you expect an approval from them.
"A credit freeze can delay, interfere with or prohibit the approval of any request or application you make regarding a new loan, credit, mortgage, insurance or other services," said Freddie Huynh, vice president of credit risk analytics with Freedom Financial Network in Phoenix. "If any of these are relevant, you will need to lift the freeze temporarily, either for a specific time or for a specific entity."
That's where your new personal identification number, or PIN, comes in. The credit bureaus will send these numbers to you after you freeze your credit. You can then use these numbers to unfreeze or refreeze your credit as you'd like.
Again, though, these actions are not always free. Depending on where you'll live, you'll have to spend up to $10 to unfreeze your credit. This can add up. Remember, you'll have to pay that unfreezing fee for each of the three credit bureaus. In some states, that can be $30 every time you unfreeze and then $30 more every time you want to freeze your credit again.
Nate Byers, a financial planner and certified public accountant with JBC Wealth Advisors in Madison, Wisconsin, said that while a credit freeze might be an inconvenience, it is absolutely critical for those whose data has been exposed.
Byers recommends a freeze, even if you have to pay to cancel and restate the freeze as you hunt for a mortgage.
"Yes, this is a hurdle, but the outcome to focus on is protecting your identity," he said.