Freezing Your Credit is a Major Decision: Give it Major Consideration
The growing concern over identity theft, data breaches, and lax security by both companies and individuals have caused many to consider (or jump impulsively to) freezing their credit. If you are wondering "should I freeze my credit?", give careful thought to the pros and cons of a credit freeze.
Although a credit freeze is one of the many tools you should consider for protecting your identity and credit, realize there are significant problems which are caused by freezing your credit.
How a Credit Freeze Works
When you freeze your credit with a credit bureau, the company locks down your credit file so no one is able to access it. If Wells Fargo attempts to pull your credit to approve a loan, they will effectively be told your credit file doesn't exist.
In order to make your file accessible (say if you want to apply for a loan) you must thaw your credit and then re-freeze it after the loan is approved. Depending on the state, credit freezes range from free to $10 for each time you freeze or thaw your credit.
The Golden PIN
When you lock down your credit, the credit bureau will provide you with a Personal Identification Number (PIN). This 8-digit PIN is required to unfreeze your credit when you want to apply for a loan yourself and to refreeze it again.
The Benefit of a Credit Freeze
Some financial pundits argue you should immediately freeze your credit in the wake of a security breach. The benefit is obvious: no one can use your credit for any purpose without access to the 8-digit PIN number. Provided you keep that PIN safe, your credit is heavily protected. The impacts of a credit freeze are far more complex, however, than the pundits make it sound.
The Downside of a Credit Freeze
Broadly speaking, the downside of freezing your credit is the same as the benefit: no one can use your credit. Realize "no one" includes you. A credit freeze doesn't just lock criminals out of your credit, it locks anyone and any company out of your credit as well. In order to access your credit, you'll need to thaw your credit (often at a cost). While your credit is unfrozen, you are again vulnerable to identity theft.
Pundits who don't really understand the financial system argue you can just pay the fees to continually unfreeze and refreeze your credit each time you want to use it. When you look at how often you use your credit file, the cost of doing this would be extremely prohibitive.
Your credit affects more than you think. A credit freeze creates hidden (and not-so-hidden) problems and impacts on an amazing array of financial and non-financial transactions.
Difficulty Obtaining Loans, Apartments, and Utilities
The most obvious issue is you will be blocked from obtaining any type of legitimate loan you may want. Shopping for a car, buying a house, or even getting a new credit card will become a hassle as you go through the process of unfreezing your credit.
For example, if you want to buy a car, this means while you are shopping for the car or the car loan, you will need to unfreeze your credit. During this unfrozen period, your credit will again be susceptible to identity theft.
Your credit file is also used, however, to rent apartments, hook up utilities, and get cell phone service. With a frozen credit score, you would have difficulty doing many of the normal transactions you often don't give a second thought. Worse, you'll be adding an additional cost each time you want to gain access to your credit file.
A Freeze May Increase Your Auto Insurance Premiums
Many are surprised to find out their credit score is a major component of auto insurance pricing. If you have a high credit score, you are likely enjoying lower insurance premiums because of it. Once your credit is frozen, your insurance company won't have access to your credit score to determine that portion of the auto insurance costs.
Although I don't have any inside knowledge about how an insurance company will deal with missing the credit score information, I think I'm safe in betting they won't calculate it in favor of the consumer.
A Freeze Will Break Credit Karma and Other Services
Services which help you monitor your credit or your credit score will no longer work with a credit freeze in place. These services have become second nature to financially savvy consumers who want to monitor their credit for ways to improve their score as well as for identity theft. These services require access to your credit file in order to work. With no credit file, these service will show blank.
A Freeze May Hinder Your Job Search
Many employers now pull credit during the application process to see how well you manage your money. The theory is: if you can't manage your own money, the company shouldn't trust you to manage a department budget or other cash resources.
Even in states where laws limit employers' ability to use credit in the hiring process, employers still have the ability to do review an applicant's credit. Generally, if the company can show financial responsibility is relevant to the job and the company also gains consent from the applicant, credit can still be used as a hiring criteria.
Freezing your credit will limit your job search opportunities to companies who don't review credit in their hiring process. And if you thaw your credit during the job search, your credit file will become vulnerable during the same period.
IRS E-file May Not Work
Remember, shortly after the Equifax data breach, the IRS awarded Equifax a contract to verify identities of taxpayers who electronically file their taxes. The IRS E-File system relies on information from your credit file to determine your identity. With a frozen credit report, it is likely you will have to file paper returns with the IRS. This can slow down the processing of your return, delay a refund, and possibly increase your risk of being the victim of tax fraud.
You Can't Open Financial Accounts Online
The internet has made personal finance much easier and cheaper to manage. Online-only banks, stock brokers and other financial institutions have increased competition in almost every sector of the economy. In the financial industries, this has given consumers greater choice in products, higher interest rates on savings accounts, and lower fees on investment accounts.
These online financial institutions, however, are subject to the same Know Your Customer (KYC) laws all financial institutions are subject to. KYC means they have to verify your identity before they allow you to open an account. Since you aren't in front of them with your driver's license, they rely on information in your credit file to make the verification. Without verification, it is illegal for these online financial institutions to allow you to open an account.
E-Signatures May Not Work
In a similar way, e-signatures on contracts sometimes use information in your credit file to verify you are the person signing the contract. Business owners who sign a lot of documents online, especially, should look into how their identity is verified through the e-signature systems. If the credit file is used, a freeze could hinder their business operations.
You Might Lose Your PIN!
The biggest concern is the fact you get a Personal Identification Number to unfreeze your credit in the future. If you lose the PIN, the credit bureau will have a difficult time verifying you are you when it comes time to thaw the file. This could lead to a prolonged and frustrating process for gaining access to your own credit file.
Worse, if the need to thaw your file is time-sensitive (such as when you are buying a house, searching for a job, or running a business), the lost time could cost you the opportunity.
Give Careful Consideration to a Credit Freeze
A credit freeze is definitely one of the tools one should consider in the wake of the Equifax data breach. It's also the most extreme tool you have. Make sure to carefully consider the significant benefits and significant costs which go along with a credit freeze.
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Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance. His career, including being a former credit union Vice President, offers insight into what the Equifax data breach means for consumers. He can be reached for comment at info@purposefulfinance.org.