What is a credit freeze?
Equifax’s recent security breach gave scammers access to the Social Security numbers, birth dates, and addresses of 143 million Americans. In response, many people implemented a credit freeze.
A credit freeze prevents the three major credit reporting agencies from providing a person’s credit report and credit score to new creditors. This means possible fraudsters can’t open new accounts. The only way to reverse that is for the consumer to “thaw” or unfreeze the credit freeze.
Credit bureaus can still provide current creditors and debt collectors your credit history even if you have frozen your credit.
However, there is a downside. A credit freeze can also prevent you from getting new credit cards, a mortgage or a car. This can stall or even prevent you from opening new accounts. If you’re going for a new job, a credit freeze could also prevent your prospective employer from reviewing your credit history during the hiring process.
Credit freezes can affect your life in many ways, but the good news is that they usually don’t impact auto and home insurance rates.
Why would your credit history even play a role in insurance? Insurance companies in most states can use your credit score when devising rates (only California, Hawaii, and Massachusetts forbid that practice). Insurance companies that use a person’s credit history do so to assess potential risk. For instance, a person with a low credit score is considered a higher risk, which means that person may pay higher rates than someone with excellent credit.
Can a credit freeze affect your insurance?
Credit freezes don’t usually affect your auto and home insurance. Leslie Tayne, founder and head attorney at the Tayne Law Group in Melville, N.Y., who has nearly 20 years of experience in consumer and business financial debt-related services, said credit freezes don’t typically prevent current leaders or insurance companies from seeing a person’s credit history. Most states have an exception that allows insurers to see credit reports regardless of a freeze.
That said, if you’re up for renewal or shopping for a new insurance policy, you may still want to make a phone call.
“Most insurers can see your credit history, but if you are up for renewal or are looking into a new insurance policy, inform your insurance provider that your credit is frozen and ask them specifically if it will affect your rate,” said Tayne.
In addition to contacting your insurance agent or company, Penny Gusner, consumer analyst at Insure.com, suggested consumers check with your state’s Department of Insurance about specific state laws affecting credit freezes, if you’re concerned about how the freeze may affect insurance rates.
What if an insurer can’t see my credit history?
When an insurance company or creditor can’t see your credit history, the credit bureau may say it’s a “no hit.” That’s an industry term meaning there is no credit history available. It won’t tell the insurer why the credit history isn’t available, so the insurer may think you have no credit history. This could make the insurer give you a higher rate.
If a person’s credit history comes back as “no hit,” the creditor or insurer likely won’t notify you about the issue. Depending on your state, you may not even realize there’s a problem until you see your rates.
Gusner said some states require insurers to provide a reason why they’ve changed rates on their declarations page. It might say that the company was unable to obtain a credit history.
“If you have a credit freeze and renew with your current insurer, I’d give your agent a call the month before your renewal date to say you have a credit freeze and to make sure it won’t affect the company’s ability to rate you properly,” said Gusner.
Pros and cons of credit freezes
Many Americans rushed to freeze their credit after the Equifax breach, but doing so isn’t for everyone.
One of the biggest problems with freezing your credit is that it will hamper getting more credit.
“The negative side to a credit freeze is that credit freezes can create delays and problems when credit is needed quickly in the case of applying for a loan, credit cards, or job or looking to buy or rent a home or contract with a utility company during the freeze period. Consumers will have to unfreeze their credit any time they want to make a purchase or obtain a loan or apply for a job that requires a background check. Unfreezing credit can be time-consuming and may involve a fee to temporarily lift or remove a freeze,” said Tayne.
Here are some pros and cons to help you decide whether a credit freeze is right for you:
- More credit protection to stop fraudsters from opening new accounts.
- Peace of mind, especially for victims of credit card fraud.
- It’s usually permanent until you decide to remove the freeze except for a handful of states that only allow seven-year freezes.
- It doesn’t affect your credit score.
- You have to contact the three major credit bureaus either by phone or online.
- It costs money to freeze an account.
- You will likely have to pay again when you want the freeze to end — even if it’s temporary.
You can never be too careful with your credit, but in some situations, a credit freeze may be overkill and problematic — especially if you’re buying a home or car. So, who should implement a credit freeze?
“I would suggest a credit freeze in the event someone should become a victim of identity theft as well as anyone who is elderly and not using credit. People who don’t need credit, such as someone who is terminally ill, has a long-term illness, is in rehab, prison or in the military overseas should freeze their credit,” said Tayne.
Alternatives to a credit freeze
Credit freezes are a way to protect yourself, but there are other avenues if you don’t want to take the credit freeze route.
One way that is free and not as intensive is a fraud alert. You can request a 90-day fraud alert that asks potential creditors to verify personal information before issuing a card.
Something else to keep in mind is that credit freezes don’t protect you against fraud on your current accounts. For instance, if a fraudster gets your credit card number, a credit freeze won’t help you.
There are ways to safeguard yourself for those situations. Here are four ways to stay on top of your credit:
- Credit monitoring: Many credit cards offer credit monitoring services, and some are free. The monitoring system will alert you when it sees suspicious activity, such as a large purchase, a charge made in another country, and even an especially large tip.
- Free credit report: You’re eligible for one free credit report per year. It won’t affect your credit score. This allows you to make sure the information is correct and check for any suspicious inquiries or new accounts.
- Review your accounts: Credit cards often offer apps that can allow you to keep regular tabs on your credit card, and some cards alert you via text or push notification when purchases are made. This keeps you on top of your credit card activity.
- Update your account passwords: Make sure you use a long, strong, unique password for every account.
How to freeze your credit
If you’ve decided a credit freeze is right for you, you will need to contact the three major credit bureaus:
Each will charge you to implement a credit freeze. It’s usually $10 or less each. You will provide them with your personal information, including name, address, date of birth, and Social Security number.
The credit bureaus will confirm the freeze and give you a password or PIN in case you need to thaw or lift the freeze later. If you do unfreeze later, you will likely be charged a similar amount. Some states don’t allow fees for identity theft victims or senior citizens. You can check out the different fees by state on this U.S. PIRG map.