Should I pay for credit monitoring?
A reader wants to know which of two credit monitoring services she's using is the better deal. My answer? Drop them both like a bad habit.
This post comes from Stacy Johnson at partner site Money Talks News.
This question comes from our Facebook page. It's from one of the many Americans who pay to have their credit protected by a credit monitoring service.
I love your newsletter and I think I have your question of the week!
I inadvertently subscribe to two credit monitoring services with at least two different plans offered by each company (which appear to be comparable). My LifeLock membership is $23.30 a month (paid annually), while my Shield Activate membership runs me $26.95 a month, which includes my LegalShield membership of $9.95. My problem? I can't decide which is the most cost-effective provider of credit monitoring and identity theft protection.
Heather from Massachusetts
Here's your answer, Heather!
About 25 years ago, I needed a divorce attorney. I had a good friend who was a brilliant corporate lawyer, so I asked him, "Who's the best divorce lawyer in town?" His response: "That's like asking who's going to win a one-legged race."
He didn't have much respect for divorce lawyers.
I feel like answering Heather's question the same way, because I have little respect for companies charging big bucks for credit monitoring. Here's why.
Converting fear into fees
They say sex sells, and I'm sure they're right. But I doubt it outsells fear. From burglar alarms to bomb shelters, Americans shell out billions annually to protect against all manner of evil: some real, much greatly exaggerated. But wherever fear can be churned up, you can bet there's someone not far behind making a buck.
Such is the case with credit monitoring.
These services are more sizzle than steak for at least four reasons.
1. You're not liable if someone opens credit in your name
If someone forges your signature on a credit application, check or anywhere else, you're generally not responsible for the results. As with anyone stealing anything, the thief is liable. And if the thief isn't caught or can't make restitution, it's a problem for the institution that accepted the fraudulent charge, not you.
Of course, we've all read stories of how credit fraud is passed along to consumers in the form of higher prices. We've also read about the nightmare that ensues when your identity is stolen: Your credit is trashed and you're forced to spend months -- even years -- restoring it.
So why isn't paying for credit monitoring money well spent?
2. Credit monitoring doesn't prevent ID theft
Monitoring your credit is marketed as if it's a burglar alarm that keeps bad guys out. But what it more closely resembles is an alarm that's tripped as the bad guys are leaving. By definition, credit monitoring can only monitor transactions that have already occurred. What you want is to prevent them from happening in the first place.
As it happens, dissuading crooks from making off with your identity and going on a spending spree isn't hard to do, and it doesn't cost a dime. Just put a fraud alert on your account.
According to Experian, "Fraud alert messages notify potential credit grantors to verify your identification before extending credit in your name in case someone is using your information without your consent."
Doesn't that seem like a good idea? It costs nothing and there aren't a lot of hoops to jump through. Take a look at the form and see for yourself.
Fraud alerts aren't new. I recommended them in 2009. According to this page of the Federal Trade Commission website, they're only supposed to be used by "people who've had their ID stolen -- or who suspect it may have been stolen." But isn't that everyone these days?
So fraud alerts are one way to slow crooks down. An even more effective method is a credit freeze. A freeze means nobody -- including you -- can open new credit until your account is "thawed," a process that can take a few days.
Unlike fraud alerts, credit freezes aren't always free or even available, depending on where you live, and some states also allow fees to be charged to temporarily lift the freeze. Read more about credit freezes at this page of FTC.gov, and learn about the rules in your state at this page of the Consumers Union website.
3. Who's monitoring the monitors?
While LifeLock is a heavy advertiser, here's something they don't advertise: In 2008, they were sued for misleading consumers. From the website of one of the law firms that brought a suit:
According to the suit, LifeLock's "proven solution" consists of illegally placing and renewing fraud alerts under consumers' names with credit bureaus. Under the federal Fair Credit Reporting Act, however, corporations such as LifeLock are not allowed to place fraud alerts on a consumers' behalf -- in fact, according to the complaint, the law was written so as to specifically bar credit-repair companies from improperly using fraud alerts.
In short, LifeLock was charging monthly for doing something both easy and free: putting on a fraud alert. And it's supposed to be something only you can do.
In 2010, the FTC collected $11 million from a settlement with LifeLock. The agency said, "The FTC charged that LifeLock provided less protection against identity theft than promised and made claims about its own data security that were not true."
I interviewed a spokesperson from the company shortly after these actions were settled, and he assured me their business model had changed. He said they'd switched to "proprietary algorithms" to proactively monitor and protect their clients' credit.
LifeLock isn't the only company that's found itself in hot water over credit monitoring. Last year the Consumer Financial Protection Bureau required Capital One to refund about $140 million to 2 million customers and pay an additional $25 million penalty for misleading consumers into paying for add-on credit card products like payment protection and credit monitoring.
4. It costs too much
Against a backdrop of $11 for a credit report or $20 for a credit score, paying $10 a month for unlimited looks may seem like a bargain. But considering what credit reporting agencies charge wholesale clients, it's outrageous. While these agencies are allowed to charge you up to $11 to see your credit report, they routinely sell them to corporate clients for as little as 20 cents.
More outrageous in my opinion is the fact that you should need these services in the first place. Unless you're the one who negligently leaves your credit information lying around, you shouldn't have to worry about your credit history being stolen, and you shouldn't have to jump through hoops if it happens. The banking and credit reporting industries make billions annually from American consumers. If they can't be bothered to create a system that protects the information they collect and sell, they should solve -- and pay for -- the problems that result.
But instead of creating a safer system, they craft clever commercials to sell you "protection."
Is it all bad?
There are those who disagree with me and tout credit monitoring and protection as a smart thing to do. For example, in this article, personal finance author Lynnette Khalfani-Cox says:
The single biggest reason to use credit monitoring is that you'll receive an incredible amount of credit education simply by staying on top of your credit. The mere act of constantly reviewing your credit files and being aware of changes to your credit profile promotes enhanced financial literacy and better credit awareness.
Monitoring your credit is a good educational experience. And if you're going to be applying for a mortgage or other big loan, the three free reports you're entitled to yearly from AnnualCreditReport.com may not be enough. But paying $12.95 a month -- or more than $50 in Heather's case -- for "education"? I've managed to keep my credit pristine without it. So can Heather, and so can you.
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