When Freezing Your Credit Is a Bad Idea

Knowing when to place a security freeze on your credit reports may be almost as important as knowing when not to do so. We answer credit questions from our Facebook fans, and one of them recently asked:

Will putting a freeze on my credit file be a good thing if I am trying to rebuild my credit and raise my score?

First, a reminder of the basics. A security freeze essentially “locks down” your credit file. If anyone other than your current creditors wants to obtain your credit report or credit scores, you’ll have to first “unfreeze” your report by providing a Personal Identification Number (PIN) supplied to you when you placed the freeze. A fraud alert, on the other hand, simply notifies companies that obtain your credit information that they should take extra precautions to verify your identity before extending credit.

Freezing your credit file may seem like a good idea, and there are times when it is an essential step in protecting yourself from further problems.

“We’d recommend a security freeze to someone who is a severe victim of identity theft,” says Brett Montgomery, a manager in the Fraud Resolution Center for Identity Theft 911. “This would be a situation that’s really bad, when the victim is getting hit with all types of identity theft (such as) financial, employment, etc.”

But if you have not been a victim of fraud you may want to step back and consider the possible drawbacks before you rush into freezing your files.

Get everything you need to master your credit today.

Get started for free

Cost

You may have to pay a fee to place the freeze, to unthaw it each time you want the freeze to be lifted, and then again when you permanently remove the freeze. Those costs, which are are capped by state law in virtually every state, range from $3 to $10 each.

If your identity has been stolen, though, you probably don’t have to worry about cost. In almost every state, you cannot be charged for placing, raising or canceling a freeze if you are a victim of identity theft. Oftentimes, though, you must file a report with law enforcement in order to qualify for these services. In addition, in some states, some or all of these fees may be waived for those over 65. (In a few states, a security freeze can be placed for free for minor children.)

Hassle

“We get phone calls from people who want to lift their credit freezes but they’ve lost their PIN,” says Montgomery. “They find that they have to work with the credit bureaus to complete additional forms of identification verification to lift the freeze.”

Even if you aren’t seeking credit, you may be surprised how often your credit reports and scores need to be accessed by a third party. On its website, Experian lists numerous credit-related activities that can be slowed down by a security freeze. These include any “request or application you make regarding a new loan, credit, mortgage, insurance, government services or payments, rental housing, employment, investment, license, cellular telephone, utilities, digital signature, Internet credit card transaction or other services, including an extension of credit at point of sale.”

“The most frantic angry calls we get are from people who said their cellphone broke and they can’t get a new cellphone,” says Maxine Sweet, vice president of public education at Experian. “Cellphone contracts are a huge area of fraud so a lot of cellular providers check your credit reports.”

In addition, if you move or your personal information changes, you will have to report those changes to the credit reporting agencies. (Normally, that happens when creditors update the information they report to the credit reporting agencies.)

It’s Overkill

While it’s unnerving to discover that someone went on a shopping spree using your credit card, that doesn’t necessarily mean that you have been a victim of identity theft. Instead, you may simply be a credit fraud victim. The difference between the two? In the latter case the only information compromised was that one credit card account number. “People tend to put security freezes on their file when they have simplistic fraud,” says Montgomery. “They make a mountain out of a molehill.”

If your wallet is stolen or one of your credit cards is used by a thief, you may want to consider a fraud alert instead. On the other hand, keep in mind that a fraud alert doesn’t completely stop someone from applying for credit in your name, so there is some potential risk.

How to Decide If You Need to Freeze Your Credit

Getting back to our Facebook fan’s question, we asked her why she thought that placing a security freeze help her rebuild her credit. After some back and forth, we discovered she had been a victim of taxpayer identity theft. Someone had used her information to file a fraudulent tax return and get a refund. That would certainly entitle her to a free freeze in most states, but she hadn’t yet obtained a police report or reported the theft of her personal information to anyone outside the Internal Revenue Service.

We suggested she take several steps. The first would be to report the tax fraud situation to her local law enforcement agency and get a police report or similar documentation. She should also review her free annual credit reports to see if her personal information had been used to apply for credit. If not, she could place a fraud alert on her credit reports, alerting creditors to be careful before extending credit. If it turns out that the crooks had applied for credit in her name, then she could consider a credit freeze.

We also encouraged her to monitor her credit score using Credit.com’s free Credit Report Card. That way, each month, she will be alerted to changes in her score and can investigate further if there are changes she doesn’t understand.

“For anyone who does (place a freeze), you have to understand that you have to take the good with the bad,” says Sweet. “We forget how convenient it is to get a credit report that lets us get services when we need them.”

Image: iStock