Smart Money Podcast: ‘Is Identity Theft Protection Worth It?’

This week’s question is from Andrew, who says, "I've been thinking about signing up for one of those identity theft protection services, but I'm not sure if they're really worth it. How much am I actually at risk of being a victim of identity theft, and will these services help me avoid identity theft?"

Our take

Security experts say everyone’s at risk of identity theft, because so much of our personal information has been exposed in various database breaches. But the potential fallout ranges from minimal to horrific. If someone steals your credit card number, for example, you’re protected from having to pay the bogus charges once you report the fraud. If someone steals your identity and commits a crime, you could wind up in jail. If they get medical care or bilk an insurance company, those records could get mingled with your own with potentially life-threatening consequences.

Credit monitoring services play on that fear by advertising “identity theft protection services.” But they can’t actually protect you from identity theft. Often the best they can do is give you early warning. They also can help you take some steps to make yourself less of a target for some types of identity theft, but you can do that yourself for free:

• File early. NerdWallet recommends people file their tax returns as early as possible to prevent refund fraud.

• Freeze your credit reports. Security freezes will help ward off most “new account” fraud, where someone opens a credit card or gets a loan in your name.

• Monitor your statements. Checking your bank and credit card transactions will give you early warning about “account takeover” fraud, where someone else dips into your account or makes unauthorized charges.

• Watch your credit. Monitoring a credit score and checking your credit reports regularly can help you spot problems as well.

• Be stingy with your information. Many companies asking for your Social Security number don’t need it, for example. The fewer places that have your data, the better.

Our tips

• We’re all at risk. Identity theft comes in many forms, and no one should think they’re immune.

• We can make ourselves smaller targets. Taking a few steps can make stealing our identity enough of a hassle that the bad guys move on to someone else.

• No service can protect you against identity theft. At best, monitoring services can give you early warning and then help you after you’ve become a victim.

More about identity theft on NerdWallet:

Is Identity Theft Protection Worth It?

Identity Theft Protection You May Not Know You Already Have

In SIM Swap Fraud, Criminals Really Have Your Number

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, return to the podcast homepage.

Episode transcript

Sean Pyles: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm your host, Sean Pyles.

Liz Weston: And I'm your other host, Liz Weston. As always, be sure to send us your money questions. Call or text us on the Nerd hotline at 901-730-6373, that's 901-730-NERD, or email us at [email protected].

Sean: And while you're at it, please rate, review and subscribe wherever you are getting this podcast.

Liz: This episode we're talking about whether you're really an identity theft target and what you can do about it if you are. First though, Sean and I are going to dive into our "This Week In Your Money" segment, which is all about summer travel plans this time around.

Sean: Or maybe the lack of summer travel plans this year. I wanted to talk about this though, because now that we're on the other side of Memorial Day, this is typically when we'd start to set our itineraries, pack our bags, and pull out our travel credit cards to make the most of our miles and points as we jet off to our vacations. And that's just not as feasible as it used to be. And with that, our spending habits and credit cards of choice have changed, or they have for me at least. So that brings me to my first question for you, Liz. I'm wondering how this whole global pandemic thing has affected your plans for the summer.

Liz: Well, pretty much torpedoed them completely.

Sean: Understandably.

Liz: Yeah. I don't think I'm the only person that has this issue. So my daughter and I were going to go do some college tours, and that obviously is off the table. The colleges are doing a lot of virtual visits so that you can see the campus and talk to people. So that's good. It's not as same as actually getting there, though, and I'm really kind of disappointed about that. And then my husband was supposed to be teaching some workshops in Europe and we were going to tag along, and obviously that's all down the tubes as well. Yeah. It's kind of a nice little perk of being able to tag along with him, but you know, that's the way things are. A lot of people had a lot of disappointments this summer. So we're not the only ones. How about you?

Sean: Well, I had a couple of plans myself. First, I was going to fly my twin sister out to see me in Portland for our birthday, which is coming up in mid-June. Yeah. I've been really wanting to get her out here for a while and we had everything set and then everything kind of fell apart. And then I was also planning a pilgrimage to Dollywood with two of my best friends from college. We've gone before. It's sort of a space for us that we just love so much and it was going to be a ton of fun. But at the same time I realized, thinking about this, I'm actually going to be saving a ton of money by not doing these two trips. It's going to be, I mean, just guessing here, probably around $1,500, flights, food, lodging, all of that. So I'm changing my spending habits as a result of not having these plans.

So first of all, I'm putting all of the money that I would be spending on a trip like this into savings. Some of it is my emergency fund, which I'm trying to beef up where there's a lot of uncertainty right now. And I'm also putting part of it into my travel fund for next year, so that when travel is safe again, I can go all out.

Liz: That's a great idea. We've been getting a lot of refunds, money coming back in for various things that we either canceled or were canceled for us. So we've done the same thing, is stuffed that money into savings so that it's there for next year. I've also got an automatic savings plan set up. So we have a certain amount of money that goes from our checking account into an online savings account for vacations and for travel. And I love having that money earmarked so I don't have to worry when I go on vacation about how I'm going to pay for it all.

Sean: I have an app that I use that's similar, and it allows you to make different savings accounts for different goals like that. Like one can be for clothes that you want. One can be for travel. And I do pretty much the same thing with that, where it's really handy to have it compartmentalize so, you know, OK, I'm saving 50 bucks a month for my travel plans. Over time, it really adds up a lot. So that's easier to do, and I have a lot more that's going to be in that account for next year.

Liz: And that's taking advantage of behavioral finance because we know that once we put a label on something, we're much less likely to tap it for something else. And that's why I've got, I want to say a dozen different sub accounts at my online bank because if it's one big emergency fund or one big savings account, it's really easy to spend the money and then realize, oops, I needed to save some of it for x and I've spent it all on y. But this way it kind of keeps me honest. And it is really hard for me to go in and grab money that's earmarked for vacation if I needed it for something else. It actually helps me keep my hands off it.

Sean: One thing that I've also noticed is that the way I use my credit cards has totally changed over the past few months because I'm not going to be traveling. I've pretty much stopped using my travel credit card entirely. Typically, I'll ramp up my use of it and the early months of the year, so I can get a bunch of points I can use for my summer travel. But then once things went into lockdown, I switched to my cash-back card exclusively.

Liz: Yeah. And a lot of things are changing. So it might be worth taking a look at what categories are getting extra bonuses, because I noticed a lot of the cards that are travel-focused now have a grocery category where you can get extra points.

Sean: Because they want you to keep using them.

Liz: Exactly. Yeah. And some of the cards with rotating categories have been changing and beefing those up as well. So I'm continuing to use our travel cards. Also, I've gone in and taken a look at, OK, are any of my points going to expire because of this pandemic and I can't use them? And it seems like most of the credit card companies, and frequent travel plans as well, are extending the expiration dates. And they know that everybody's in the same boat. We can't travel right now. So it seems like most of the cards are making some accommodations.

Sean: And that's something I was worried about as well. And looking into it, it seems like most travel credit cards, if they do have an expiration date on points, it's between 18 and 36 months, which is decently flexible, but even that has been extended because of our current circumstances.

Liz: Yeah. And I'm such a nerd about this. I've actually put dates on my calendar to say, OK, redo this.

Sean: Right.

Liz: You know, like three or four months out before points or miles are supposed to expire, I go in and take a look and see what the situation is. So, I mean, hopefully this will be not as bad next year and we won't be dealing with this all over again. But in case we are, I want to know what the situation is.

Sean: Something I've been thinking about as well, is the feasibility of doing a social distance or socially responsible road trip of some sort, whether it's a day trip. I was talking to one of my friends and her partner was getting really itchy. He typically takes a vacation this time of year. And she said, "Hey, let's just find a really remote beach, drive there, have a picnic and go home." And it was a day trip that they did. And that was a really nice vacation for them. Obviously everyone has their own level of risk that they're willing to take. But I think that there are ways where you can have many little vacations like that and kind of get that itch scratched.

Liz: Yeah. I think that's a great idea. And actually, my husband finally got me out of the house because he loves to go for drives in his Mustang. He's got a convertible Mustang and it's way fun. And I've just been kind of puttering around the house. And finally, he got me out for a long drive and it was like, "Oh, this is really nice." And did you notice how cheap gas has gotten? Holy cow.

Sean: Oh yeah, I know. And also, did you know that there's still fresh air outside of your house? It's incredible.

Liz: It is, and sunshine and nature. And yeah, here in Los Angeles, they finally opened up the trails again, which is nice. You can go get your nature fix, but even if you don't get out of the car, just driving around and seeing different things, that really helps.

Sean: Yeah. And as you mentioned, because gas is so cheap, any little trip you take like that is going to be cheaper than it would be even a few months ago, which is great. Well, while this summer may not be the most exciting travel-packed summer that you've had in your life — I know it's not going to be for me — I'm looking forward to making the most of it and the way that I can in terms of saving and also being able to make my plans for next year as well. So there is a silver lining, where it gives us more time to make those plans, to save more money and to coordinate with friends, so when all this is over, we can have a good time together.

Liz: Exactly. Because that's part of the fun of a vacation is planning it in advance. And I think that's what's kind of thrown a lot of us that love to travel is that we can't put any definite plans in place, but you can still do the research. You can still get ready for it.

Sean: Pick out the hotel. Look into what flights might be like, and then eventually when things settle down again, pull the trigger. Get ready for it.

Liz: Absolutely.

Sean: All right. Well, I think that about covers our summer travel chat. Let's get to this episode's question from Andrew. He says, "I've been thinking about signing up for one of those identity theft protection services, but I'm not sure if they're really worth it. How much am I actually at risk of being a victim of identity theft, and will these services help me avoid identity theft?"

Liz: OK, the answer to the second question is no, but we'll talk about . . .

Sean: Big no.

Liz: . . . Big no, but we'll talk about ways that you can protect yourself and ways that you are probably more at risk than you think.

Sean: Yeah. Identity theft is one of those rare instances where we're all pretty equally vulnerable to it, regardless of income, background, where you live, but there are some really easy steps you can take to safeguard yourself from identity theft.

So in this episode of the NerdWallet Smart Money podcast, we're going to talk about how much you're really at risk of identity theft, what you can do to protect yourself, and whether these services are really going to save you. Again, the answer is no. Let's get to it.

Liz: OK. Let's talk about the different types of identity theft because I think people think about credit card fraud, and they think about people opening up maybe an auto loan in their name. That's just a part of the problem, right?

Sean: Yeah. There are a surprising number of kinds of identity theft. The pretty common one that everyone thinks of first is maybe credit identity theft, where someone uses your credit card or opens a new line of credit using your Social Security number. Those are among the most common, but there's also child identity theft, where someone takes your kid's information. There's also synthetic identity theft, where people create a patchwork of identity details to make a consumer that doesn't even exist, which is pretty creative and horrifying. There's also taxpayer identity theft. A thief will file your tax return and steal the money that you could possibly get from the government. There's medical identity theft. There are all sorts of kinds of identity theft, and they really are just preying on your personal information however they can get it to hopefully turn a profit for themselves.

Also, we would be remiss if we didn't mention one of the many scams that have popped up due to the coronavirus pandemic. Some scammers are calling people alleging to be the Social Security Administration and demanding that you confirm your Social Security number or other information to get your relief benefits. That is a scam. Know that government agencies won't just call you out of the blue like that. And if you do get a call like this, just hang up.

Liz: Yeah. And about the tax return theft, people think, oh, well I don't get much of a refund, so I don't need to worry about this. It's important to know that the bad guys gin up those W2's and all the information so they can create the maximum refund that they're going to steal. So even if you don't typically get a refund, you could be at risk.

Sean: Exactly. And that's part of why we implore people to file as soon as they can so that they can prevent people from using their Social Security number, which is probably floating out there on the internet anyway. I think that we should all realize that our information is probably accessible if people really want to get their hands on it.

Liz: And think about the Yahoo breach, where people's emails were taken. People think, oh, you know, who cares? It's just my email. Think about all the information that flows through your email account about your health, about your finances, about your situation at work. All that information can be used to cause lots and lots of havoc. So identity theft and these breaches are something you've got to take seriously. Oh, and let me add the medical part. That's one that's super, super scary because if somebody is getting medical care under your information, those files could be mixed in with yours, which means in an emergency, a medical provider could think that you have one condition when you don't have that or vice versa.

Sean: Right. And this is why folks like Andrew and a lot of other people might be shepherded toward signing up for one of these services, thinking that these things are going to be my savior, when that's not exactly the case. There are some pretty simple things that you can do to protect yourself from having your personal information used in ways that are going to hurt you down the road.

Liz: Let's talk first about the idea that you can prevent identity theft because I think a lot of these services are pitched that way — that somehow this will keep the bad guys from your door, and that's not true at all. Right?

Sean: Not really. Because as we mentioned, your information is out there and they can't really stop anyone from using it. What these services actually do is let you know if that has happened, but they can't prevent it, of course, because they don't know where these people are. They're not the ones saying, "Hey, don't grab that Social Security number." It's just available out there. So there's no way they can really stop anyone from using it.

Liz: It's an early alert system. And the things that you can do on your own will not absolutely prevent identity theft, but I'm going to quote Avivah Litan, who is a security expert at Gartner Research and basically says, "What you want to do is to harden your situation, basically make it difficult enough so that the bad guys go and pick on somebody else." It's similar to what you do when you're trying to burglar-proof your house. You cannot burglar-proof your house. They can get in if they're determined enough, but you just make it enough of a pain in the tuchis that they will go and bother somebody else.

Sean: One thing that's really easy to do is freezing your credit profile, as this is now free to do, thanks to the Equifax hack and the ensuing fallout from that. And it takes, what, 10 minutes to do, Liz? How long does it take you to freeze your credit?

Liz: Yeah, it doesn't take very long at all. And unfreezing it is also very, very quick. We've refinanced our mortgage several times in the past few years and I was always worried about putting on a freeze because I had heard it was very difficult to thaw the freeze. That's not true at all. I mean, it can be done in seconds. Maybe it takes minutes, and long as you keep track of the information, which it depends on the bureau, but you have a login and a password or you can have a PIN number. You got to keep track of that information because if you lose that, that is a pain. But in terms of putting it on and taking it off, it's really super easy. And it's one of those simple things that you can do that will prevent a ton of identity theft.

Sean: For those who aren't familiar with what freezing your credit is, it's basically a way to restrict access to your credit report. It prevents lenders from seeing your information, which typically keeps them from opening new fraudulent accounts in your name. Note that this won't help with medical, tax, or other noncredit forms of ID theft, but since credit identity theft is the most common kind, these easy steps that you can take to protect yourself are really worth doing.

Liz: I also want to talk about limiting exposure, the number of people who have your Social Security number. We've got a really screwed-up system where the Social Security numbers become the all-purpose identifier. That's never what it was meant to be. And now we've seen through the Equifax breach and so many others, the vulnerability of that system. So you do need to do what you can to keep that Social Security number out of as many places as possible. But a lot of times it's hard. There are a lot of people demanding your Social Security number that have no right to it. But if you kick up a fuss, you don't know what's going to happen in terms of like your doctor's office. I mean, they don't really need your Social Security number. Government probably does. Anything that's credit-related or identity-related, frankly, probably does need your Social Security number. But you got to be careful about when you're handing it out. Your veterinarian does not need your Social Security number, and mine has asked for it. It's like that's ridiculous.

Sean: You know, and one thing that people have turned to in lieu of asking for Socials is your phone number. And that's a nice alternative, but there are risks with that as well because people can do SIM swapping if they have your Social and your phone number, and they can basically take over your phone for their own purposes. So be careful with anything you're giving out because you don't know whose hands it could fall into. Maybe it's OK for the first month or a year. But think about all the things you signed up for five, 10 years ago at this point, and you punch in all of your information, and it's probably still sitting on a server somewhere. So I got a little paranoid about this stuff. So I try to limit my information as much as possible because of that.

Liz: Yeah. I wrote about SIM swaps, and they're absolutely terrifying. Basically, they're used to kind of get around the verification, the authentication systems that a lot of financial institutions use. The financial institutions for a long time used security questions, and some of them still do, and that's absolutely stupid because it's really, really easy to circumvent a security question or to find the answer to it.

Sean: The mother's maiden name.

Liz: Yes. Good Lord. You go to ancestry.com. In case you didn't know, if you need to research somebody's maiden name, it's super easy to find the answers to these things. So security questions are not secure. So then the next step is two-factor authentication. Two-factor authentication is having two steps. So you have something you know and something you have. Something you know is typically the password. And then something you have is either one of those little fobs that generates numbers or an app that generates a number, or you're texted a code. Now the problem with texting a code is, again, if your phone is taken over, if there's one of these SIM swaps, the bad guys can get that number. And some of the bad guys are simply calling up and pretending to be the bank and saying, "You were just texted this number. Can you tell me what it is?" And people will comply? You know, it's like, don't do that. Don't do that. Anyway. That's a little bit of a tangent, but SIM swap is kind of scary and you should know about it.

Sean: It's getting more and more common so people should be aware of it, because they think, oh, if you've got a text code, it's this standard form of security. I can just go ahead with that. And it's not the case anymore, which is even scarier.

Liz: Yes.

Sean: But I do want to turn to the second part of Andrew's question now on whether these ID theft protection companies, as they like to call themselves, can actually prevent ID theft. So as we said, the answer is no. They can't prevent bad actors from exploiting your personal information. Their services really fall under three main categories. As I mentioned before, monitoring, they'll let you know if your information appears on the dark web and then they'll alert you to that, which is the second part of their service, and some offer recovery as well. So if your personal information is used to get access to your bank account or open lines of credit, they'll help you resolve that matter. And that's a pretty valuable service I will say.

But for the first two things, you can pretty much do that on your own if you want to do the work for that. But there is a word of caution here I would throw out around signing up for these services. They will often offer a lower-tier service that's around $10 a month to monitor a single credit bureau, but that's not sufficient. You really need to have all three bureaus monitored or frozen is really the easy way to do it. Otherwise, it's like locking only one door in your house. If you still have your back door open, someone could still get in there and use your credit information for whatever malevolent purpose they have. So you have to pay probably around 30 bucks a month to get all three bureaus monitored. And that adds up really, really quickly. And so you might want to think to yourself, "OK do I want to pay for the service to do the work that I don't want to do myself? Or am I OK just logging in, freezing my credit and making sure that I'm secured?"

Liz: It's not a lot of work to do the basic monitoring. At NerdWallet, we have a free credit score. If you sign up for that, at least you'll be alerted if there's a big problem. If your credit score suddenly drops, you'll be notified. You can rush in and see what the problem is. So that's a monitoring service that's free, that's easy to set up. We also recommend you go check your actual credit report at annualcreditreport.com. We have a version on NerdWallet, but you can get the full file directly from the bureaus at that annualcreditreport.com site. And by the way, make sure you're going to the right site because there's some lookalike sites.

Sean: All right, Andrew. So to answer your question, ID theft is a threat that we all face, but you are likely your own best defense against it. If you really want peace of mind, I say freeze your credit. Do the steps that you can do pretty easily and for free to protect yourself. But if you want that extra peace of mind and you don't mind spending 30 bucks a month or so for one of these services, knock yourself out. Do what you need to do to feel protected.

Liz: All right. And with that, let's get to our takeaway tips. Takeaway tip number one, identity theft comes in many forms and we should assume we're all at risk.

Sean: Next up, you are your own best defense against identity theft. Freeze your credit profiles, monitor your billing statements, and be conservative about where you give your personal information.

Liz: And finally, if you're thinking about signing up for an identity theft protection service, know that they can't actually prevent ID theft, but they can alert you when it happened. Weigh the pros and cons before signing up since these services are not cheap.

And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373, that's 901-730-NERD. You can also email us at [email protected]. You can even email us voice memos of your questions. However you want to send them to us is fine. Also visit nerdwallet.com/podcast for more info on this episode. And remember to subscribe, rate and review us wherever you're getting this podcast.