Credit freezes go national, get chilly welcome
Consumer advocates say they're overpriced, underpublicized
Beginning Nov. 1, 2007, all American consumers gained a new weapon they can use to combat fraud and identity theft -- the credit freeze, which prevents new credit from being issued in their names. All three of the nation's three major credit bureaus recently, and somewhat reluctantly, allowed consumers the freeze option after 39 states and the District of Columbia passed laws requiring it.
But while some have said the decision by Equifax, Experian and TransUnion allowing all consumers to freeze their credit files is a step in the right direction, for many consumer rights advocates, the change doesn't go far enough.
The credit bureaus' actions enable all consumers to place a credit freeze (also known as a security freeze) on their credit files. Previously, 11 states did not offer their residents the opportunity to freeze their credit files. TransUnion made security freezes available to all consumers Oct. 15; Equifax and Experian followed suit on Oct. 31 and Nov. 1.
Their actions should swell the number of people using freezes. According to the Consumer Data Industry Association, a trade group that represents the three credit bureaus, 50,000 to 70,000 consumers currently use credit freezes.
What's a freeze?
Placing a "security freeze" on their credit files blocks lender access to a consumer's credit file, preventing new lines of credit from being opened in the consumer's name. The consumer is later able to temporarily or permanently remove the credit freeze using a PIN number when access to credit is needed. Freezing and thawing credit has no impact on a consumer's credit score.
State laws mandating credit freezes became increasingly common in recent years, as legislatures responded to consumers' demands for protection from identity theft and other forms of credit fraud. The recent actions by the three credit bureaus will set a baseline; if states have more stringent requirements, they will remain in force.
The tool's usefulness is a source of a high-stakes debate. Consumer advocates praise credit freezes as a useful way to thwart identity theft and fraud. Lenders and the credit bureaus see it as a last resort that otherwise slows consumers' legitimate credit needs.
Credit bureaus' view
The credit bureaus say credit freezes should not be the go-to defense for all consumers fearful of identity theft. "It's not the best tool for everybody," says Rod Griffin, consumer communication manager for Experian. "It can be the best tool for victims of identity theft if they have an extreme case." TransUnion and Equifax representatives were repeatedly asked to comment for this story, but declined.
Griffin says that placing a freeze on credit is a somewhat extreme decision that takes consumers out of the credit marketplace altogether, with the exception of businesses they've had existing relationships with, so that consumers need to gauge the amount of protection that is right for them. "It takes a lot longer to thaw out credit than it does to freeze it. That can leave consumers in a bad situation," says National Retail Federation spokesman J. Craig Shearman. That means a credit freeze can cause delays for anyone in need of credit, a new car or cellphone contract, or experiencing a medical emergency and needing credit to make payment. "People don't think about how often a credit report is needed and the difficulties it can cause," Griffin says.
Additionally, Griffin says that consumers need to be aware that credit fraud and identity theft are not the same thing. "Credit fraud is not identity theft. It may be a symptom of identity theft, but it's not the crime itself," he says. Therefore, having a security freeze in place can block identity thieves from opening credit in the victim's name, but they do not guard against the theft of personal information in the first place.
Consumers seeking a less aggressive approach are often steered toward credit monitoring services. These services, which range in cost from $4.95 to $14.95 a month, alert consumers to changes in their credit files, often via e-mail. Credit monitoring is frequently cited as a way for consumers to receive an early warning sign of possible credit fraud without adding a barrier to opening new lines of credit themselves.
Consumer advocates' view
Nevertheless, credit freezes seem to be the best tool currently available. "We consider security freezes to be the best or most effective manner or preventing an individual's exposure to identity theft," says Paul Stephens, Director of Policy and Advocacy with the consumer information and advocacy organization Privacy Rights Clearinghouse.
Many consumer advocates take issue with how the credit bureaus have instituted the offering arguing that the credit bureaus were slow to adopt freezes and their changes do not go far enough. "It is fair to say the credit bureaus dragged their feet on making credit freezes easy and available," says Joe Ridout, spokesman for the national nonprofit education and advocacy group Consumer Action. Ridout says the decision to offer credit freezes to all consumers nationwide was a step in the right direction, but that the credit bureaus could do more. "Consumers should have the right to freeze their credit for any reason, and they shouldn't be charged for it," he says.
As for the cost, barring any state-mandated caps on pricing, the credit bureaus typically charge about $10 for consumers to freeze and later thaw their credit. That's too high, argues Eric Eisenstein, an assistant professor in the Johnson School of Management at Cornell University. "In a worst-case scenario, it should cost a bureau $2.50 to do a freeze." He says that the credit bureaus could lower the amount security freezes cost consumers by choosing to share information (rather than having each consumer contact and pay a fee individually to each credit bureau) and limiting human involvement in the process.
Critics also say the bureaus discourage consumer use of credit freezes, pushing credit monitoring products in their place. "The credit bureaus want to discourage credit freezes because they can't sell your information to as many possible lenders," says Joe Ridout of Consumer Action. "Their emphasis has been to sell credit monitoring services," he says. Monitoring services issue a warning after credit inquiries or loans, but do not prevent consumers from becoming a victim. Eisenstein makes a similar argument. "The credit bureaus make boatloads of money on selling credit monitoring services. Credit monitoring services have not been shown to work," he says.
Not so, says Experian's Griffin. He notes that many consumers spend more on their daily coffee than they do on credit freezes. "We think that the fee that we've established and has been established in virtually every state is fair. It's a service fee for the cost of a service," he says, adding that a security freeze remains free for victims of identity theft. That cost is generally no more expensive than the recurring monthly cost for credit monitoring, even for consumers who decide to thaw and re-freeze their files monthly. As for criticism that credit bureaus push credit alerts at the expense of credit freezes, "They're simply two different tools for consumers who can choose what is right for them," he says.
Consumer advocates counter that by discouraging the use of credit freezes the credit bureaus have also ensured a constant low level of credit fraud. As long as consumers worry about identity theft, at least some are going to sign up for credit monitoring services, which are profitable for the credit bureaus, Eisenstein says.
At the same time, with no widespread public education campaign to spread the word about security freezes, many consumers are unaware of their existence or assume that a credit freeze is simply the default setting on credit files. "There isn't a huge volume of people signed up for it and there probably won't ever be," says Joanne McNabb, chief of the California Office of Privacy protection, whose state was the first to pass credit freeze legislation.
Whether credit freezes become more popular with consumers depends on the credit bureaus. "They clearly already have the ability to offer a quick lift of the security freeze. We don't think they should wait until state laws require it before they begin offering that benefit to consumers," says Michael McCauley, media director for Consumers Union's Financial Privacy Now campaign. Cornell's Eisenstein boils it down to a simple formula for credit bureaus to follow: "We should make the prices low, make the awareness level high, and make it convenient," he says.
Related article: State-by-state list of credit freeze laws.
To comment on this story, write to firstname.lastname@example.org.
- How to protect your credit score when churning rewards cards – Card churning can hurt your score if you don't have a plan to pay off your balances ...
- 5 less-obvious ways to damage your credit score – Missing a credit card payment is a surefire way to mess up your credit score. Here are five less-obvious ways ...
- My credit score’s 750! Why was I denied a card? – Five reasons why you may be denied a credit card, even if your credit score is excellent ...