Why freezing your credit is the best way to prevent identity theft

Written by
Peter Dunn
money freeze

As someone who has had their identity stolen in two very different ways, I can tell you that there's a tremendous amount of confusion surrounding identity theft, fraud alerts, and credit freezes. Today you will learn a great deal about different types of security breaches and the best way to protect yourself from all sorts of fraud.

There are two primary types of security breaches: financial account breaches and identifying information breaches. When Target and Home Depot got hacked recently, financial accounts were stolen. This means that if you used a debit or credit card at those stores, then your card numbers were stolen, and then used to buy whatever thieves wanted to buy. It's very frustrating when someone steals your account numbers, but the solution is quite simple. You file a fraud report for the charges that aren't yours, and then you get a replacement card with new numbers. I've been the victim of this type of theft no less than five times. It's an unfortunate reality of commerce in the 21st century.

Although inconvenient and annoying, financial account breaches don't usually have permanent and long lasting effects. Banks are doing a good job of monitoring accounts, and may even call you when they detect unusual activity. For instance, in January my bank called me and asked if I just made a purchase at Kohls in Lincoln, NE. I hadn't. My account had been compromised. They cancelled my card, sent me a new one, and I filed a fraud report the next day. My bank put the $300 back into my account, and I spent the next couple of weeks updating services which draft from my checking account using my debit card information (such as Netflix). It was a pain in the neck, but I got over it very quickly.

Financial account breaches are very bad for retailers and banks, but you are mostly protected financially.

On the other hand, identifying information breaches are a big deal for consumers. If someone were to steal your Social Security number, date of birth, address, and other private information, then the thief could open a new credit account in your name, anytime they want...forever. Your date of birth does not change. Your Social Security number does not change. You can't clear the problem by changing your numbers. Those particular numbers are unchangeable.

Anthem recently suffered a data breach which could affect over 80 million people. That's 80 million sets of identifying information. The only, and I repeat, ONLY way to protect yourself is to prevent new credit lines from opening. The only way to do that is to freeze your credit. Freezing your credit simply prevents others from accessing your credit for the purpose of opening new credit lines. If you were to freeze your credit today, go shopping, and then try to open a store credit card, then it would be declined immediately.

Let's put this a different way. If a thief, armed with your identifying information, were to go shopping and try to open a credit card in your name, it would be declined immediately. And that's why everyone should freeze their credit. Trust me, you aren't going to spontaneously apply for credit and be angry that your credit is frozen. Or maybe I should say you shouldn't spontaneously apply for credit.

Freezing your credit DOES NOT affect your current credit lines. But, freezing your credit will affect someone's ability to run your credit score when you need to rent an apartment or buy a car. You should temporarily lift the credit freeze the week before you need your credit score run. Freezing your credit DOES NOT hurt your credit score.

If you are about to buy a house or car within the next month or so, or you are currently in the underwriting process, don't freeze your credit. Wait until you close on the loan, and then freeze your credit. It's not that the freeze would hurt you, it's just that logistically you'd be freezing, unfreezing, and then refreezing, which is a bit of a pain. It's not worth gumming-up your loan process. If you are about to start the Free Application For Student Aid (FAFSA) process, you need to make sure you are unfrozen when you apply. Or, you can add exceptions to freeze, directly with the credit bureaus.

I've permanently frozen my credit, and have no plans on unfreezing. I have a mortgage, and that's it. I don't plan on borrowing money ever again, so what's the point of keeping my credit available to thieves? There is no point. I strongly recommend you take a firm stance on this. Hackers and thieves will continue to chip away at the financial foundation that you've built. Freezing your credit is the best way to make sure they hit a brick wall.

For a step-by-step guide to freezing your credit, with direct links to each of the credit bureaus, clicky clicky.

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