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Credit monitoring: prescription or placebo?

By , CardRatings contributor
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Identity fraud has become so widespread, it seems hardly anyone is immune to it. 

Recently, the Federal Trade Commission found 5 percent of identity theft cases are targeting children, while the Carnegie Mellon Cy Lab noted that in over half those cases (54 percent), the child was younger than 14. Adults themselves are no stranger to fraud, as the Department of Justice estimates it's a $5.5 billion problem worldwide.

With stats like those, it's tempting to sign up for credit monitoring services. For $19 to $40 a month, these services, which are offered by credit reporting bureaus, banks and other third-party companies, promise to wipe all those problems away, providing customers with 24/7 access to their report and score, alert notifications when changes occur and support. Some, like Citi IdentityMonitor, even offer to reimburse for losses from theft (so long as the customer doesn't reside in Florida).

The problem is, not everyone's sold on these services including consumer advocates like Michelle Jun, senior attorney for Consumers Union, the policy and advocacy arm of Consumer Reports. "We don't endorse credit monitoring services since there are ways in which consumers can monitor their own accounts to look for suspicious activity or other unauthorized transactions," she said in an email. Her colleague Pamela Banks, senior policy council, puts it more bluntly: "It's totally a waste of money."

Adam Levin, founder and co-chair of Credit.com and Identity Theft 911, doesn't agree and says there's a value in paying for protection. "Credit monitoring helps you be aware. It's important from a number of perspectives," since not only can these services alert you to bills you may have missed, they can tip you off when someone's trying to access your file, or has hacked into your credit account.

Regardless, Banks says she isn't convinced of their merits. "When you call those credit agencies' numbers, the first thing they ask for is your credit card number," she says. "They are of questionable value to consumers," and are nearly impossible to get rid of once you sign up. Some consumers, she notes, have been trying to get rid of them for months. To help you decide whether credit monitoring services are right for you, take a look at their pros and cons.

Helpful reminders

As Levin points out, a good credit monitoring service can "help you be aware of you really are" with regards to your finances. "It might tip you off to things that might be real, but you didn't think were important," like a scammer diverting your mail to their address or applying for a line of credit in your name. An effective service might also nudge you when you're being forgetful. "You may not remember that you didn't pay a bill while you were away on vacation," says Levin. "If your score drops, that just might be an indication you're a victim of identity theft."

Another reason to sign up: You simply can't afford not to, says Levin. "With all these data breaches, monitoring takes on an added level of importance." And while a credit monitoring service won't protect you from the vast array of fraud that can occur, he says you'd be foolish not to rely on a service that checks your accounts on a daily basis, ensuring every transaction is yours.

Poor fraud protection

Perhaps the biggest downside to a credit monitoring service is that it can only go so far. It can't tell when a child is a victim of fraud, or if the fraud has targeted someone who's been deceased. What's more, there's no way to check if someone received medical treatment in your name or using your insurance unless you receive a collection notice or your practioner tells you.

And that's not the only kind of fraud that won't fall under a credit monitoring service's umbrella. "You won't find out you've been the victim of tax fraud until you file a return and are blocked or the refund never shows up," admits Levin. And if a driver's license has been issued in another name, depending on the state and how permissive it is, it might take a while for you to find out. With this in mind, Levin says the ideal service would combine public records monitoring with traditional credit monitoring. "But it's ideal because it doesn't exist yet."

Lenders use different scores

Another issue with credit monitoring is that the score a customer obtains from the service might not be the one their lender is using. "Consumers really don't realize there are so many different scores out there," Banks confers. "There are over 50, and the score they actualy purchase from one of those services or the 'Big 3' credit bureaus -- TransUnion, Experian and Equifax -- may not be the score the lender uses to make decisions. They could be using different score generators, or the lender could get a newer version of the score you already have." The better route? Ask your lender which score they plan on using ahead of time.

Self-monitoring is free

As Banks points out, you can always get your credit report for free once a year. And signing up for text message or email alerts through your card issuer and bank shouldn't cost you a thing. Though it'll take more work on your part, there's something to be said for knowing where your finances stand, even if you're just relying on yourself.

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