With all of the high-profile data breaches in the news over the past few years, we're constantly reminded of the importance of protecting ourselves from identity thieves. Two highly effective ways to do this is with fraud alerts and credit freezes, which despite what you may think are available to everyone, whether or not they've been a victim of identity theft. Here's what you need to know about these powerful tools, and how they can keep your identity safe.
A fraud alert makes it tougher for thieves to open credit in your name
If you have reason to believe your identity has been or will be compromised, you might want to place a fraud alert on your credit report. An initial fraud alert is free, and can be done by contacting any one of the three major credit bureaus, which then must inform the other two.
A fraud alert makes it more difficult for would-be identity thieves to open accounts in your name. When you (or someone else) applies for credit in your name, the lender checking your credit is made aware of the fraud alert and must take extra steps to verify your identity before opening an account. This can include contacting you by phone and requesting additional verification, such as a copy of your driver's license. An initial credit alert lasts for 90 days and can be renewed if necessary, and can also be removed rather easily (online) if you decide you no longer want it.
An initial credit alert is intended for consumers who think their identity has been compromised. For example, if you lose your wallet, an initial fraud alert could be a smart step to take. However, many people don't realize that it also can be used as a proactive tool to prevent identity theft, as long as you don't mind the additional identity verification requirements in the event you need to apply for credit.
If your identity has already been stolen – meaning someone has already applied for credit in your name and you have an identity theft report in hand, you can set up an extended fraud alert that will remain on your credit report for seven years.
A credit freeze gives you more protection, but has its drawbacks
This is a step beyond a fraud alert and makes it next to impossible to open an account in your name.
Essentially, a credit freeze (also known as a security freeze) prevents creditors from accessing your credit report at all. In other words, when a lender attempts to perform a credit check, they'll be denied access to your file (and credit score). Since a credit check is a universal requirement before opening a new account, a credit freeze is the single most effective way to ensure no new accounts will be opened in your name.
On the other hand, a credit freeze can be inconvenient if you need to apply for new credit. A credit freeze can be temporarily lifted (for a fee in many states), and you'll need to contact each of the three bureaus individually to do this before you fill out any credit applications.
Finally, you can also use a credit freeze to prevent thieves from applying for credit in your child's name. Similarly, if you care for a medically incapacitated adult, you can protect their identity using a credit freeze as well.
A credit freeze may cost money to set up -- usually $10 or less per credit bureau, depending on what state you live in -- and you must call all three individually. If you're already a victim of identity theft, a credit freeze is free, and a few states offer free credit freezes to whoever wants one. Unlike a fraud alert, which comes with a time limit, a credit freeze will remain in place until you choose to remove it.
An everyday process
These aren't the only ways you can keep your identity safe, but are two of the more extreme (and effective) measures you can take. There are hundreds of little things you can do to protect yourself, such as shredding sensitive documents and choosing tough-to-guess passwords for your online financial information, and even with a fraud alert or freeze in place, it's important to develop good identity protection habits.
It's unfortunate that we have to worry so much about identity theft, but that's the way it is. Fortunately, tools such as credit freezes and fraud alerts are available to protect you and your family.
Matthew Frankel owns shares of American Express. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.