The first thing a lender does when you apply for credit is pull a copy of your credit report. The information contained on your credit report will give lenders a basic overview of how you have handled credit in the past; if you have been responsible in repaying your debt or if you had difficulty meeting the terms of previous agreements. Lenders get this history from one of the three consumer reporting agencies (Equifax, Experian, TransUnion) and use the information to make a decision as to whether or not you will be approved for credit.
But sometimes you don’t want anyone accessing your credit report.
What is a credit freeze?
In 2007, laws were passed in several states that allowed consumers to control what information credit bureaus could release to creditors, the three major reporting agencies announced they would allow consumers the same right regardless of the state in which they resided. This action of controlling who has access to your credit history is called a credit freeze. Other terms have been used in its place, such as credit report freeze, credit lock down and security freeze. Regardless of the term used the result is the same, consumers have the right to “freeze” their credit report, which results in potential lenders not being authorized to view the information contained there.
Why freeze your credit?
The most common reason a person might consider voluntarily freezing their credit report would be to prevent identity theft and credit card fraud. Since lenders use your credit report to determine risk, the inability to view this information will in effect stop the process of applying for credit. When this happens, would be identity thieves or persons attempting to open fraudulent accounts in your name would be denied access to credit. This action can be used before an incident of credit card fraud or identity theft occurs or in response to these actions.
How to freeze your credit
In order to activate a credit freeze, a consumer must contact all three credit bureaus (in writing) to make the request and pay any fees associated with initiating the freeze. Depending on the state in which you reside there may be laws established that dictate favorable pricing. If you do not reside in a state with credit freeze laws, the cost is $10.00 to freeze the credit report and an additional $10 to “unfreeze” the report. Instances that may result in fees being waived include, being a victim of identity theft or credit card fraud, and consumers who subscribe to a credit monitoring service. You may also be able to freeze your credit report without charge if your information was potentially leaked, such as when a batch of personal data is breached (several major occurrences have happened in the past where identity thieves were able to access millions of personal records at once via various means).
Ramifications of a credit freeze
Once you have initiated the credit freeze, it is important to understand that all potential lenders will not longer have access to the information contained on your credit report. This means that you will also not be able to qualify for any financing, therefore it is recommended you do not attempt to apply for credit without first lifting the restrictions put in place through the freeze. You can do this in two ways, a temporary lift (thaw) where third parties have access to the report for a limited time, usually from one week to one month. The second option is a permanent lift which removes the freeze completely and allows other parties to view your credit report without time restrictions.
Remember that a credit freeze can help prevent identity theft and credit card fraud but it will not prevent all parties from having access to your credit report. Collection agencies, as well as government agencies, still have access to your information. Once you have initiated the freeze it is important to also understand potential employers will not be able to perform certain areas of a background check, which may result in lost employment opportunities.
As you can see, there are both benefits as well as drawbacks resulting from a credit freeze, therefore you should consider all options and consequences before making your final decision.