This week, Herb tackles the question of identity theft insurance, which aims to protect consumers against the after-effects of one of the nation's fastest-growing crimes.
A friend and I were discussing ID theft insurance, and she asked about buying it. Are you familiar with this type of coverage? If so, what do you think of it?
-- Andrew R., Bellevue, Wash.
With so many people worried about identity theft, this insurance is hot right now. But although the cost often seems reasonable, the benefits are usually very limited and “typically not worth the money," according to editors of Consumer Reports magazine.
Keep in mind that nobody is really sure how many people are victimized by ID theft each year. The Federal Trade Commission puts the figure at about 9.3 million individuals. A recent report by the Justice Department estimates that 3.6 million households were victimized. The majority of these cases involve a stolen credit card number, not the more serious crime of trying to steal someone’s identity by opening accounts and getting fake ID in their name.
With all the publicity about identity theft — the fastest-growing consumer crime in the country — some people are willing to pay a few dollars a month to buy peace of mind. Coverage typically costs from $20 to $100 a year, as a rider to a basic homeowner’s policy or as a stand-alone purchase. “We would definitely encourage people to consider it,” says Karl Newman, president of the Northwest Insurance Council.
The question is, what are you buying?
The National Association of Insurance Commissioners cautions consumers that insurance “cannot protect you from becoming a victim of identity theft and does not cover direct monetary losses incurred as a result of identity theft.” It simply covers some of the expenses you will incur to deal with the problem, such as the costs of making phone calls and copies, mailing documents and possibly legal bills.
Jay Foley, who runs the Identity Theft Resource Center in San Diego, tells me some policies won’t cover legal fees or lost wages due to time away from work. Most importantly, what is the deductible? They generally range from $100 to $250, but Foley says he’s seen some as high as $1,000. And the average victim spends less than $1,500 to recover from ID Theft, according to the FTC.
Also, consider this: You may be able to get ID theft protection for free. American Express, for example, makes its identity theft assistance available to all cardholders for free. It gives you round-the-clock telephone access to company representatives who will “help you determine if your identity has been stolen, navigate the recovery process, and protect yourself in the future.”
Whether or not you have ID theft insurance, there are few simple things everyone should do:
- Guard your personal information — Social Security number, account numbers and PIN codes.
- Shred all documents containing account numbers of other personal information.
- Check your bank and credit card statements each month — look for charges you didn’t make.
- Get a free copy of your credit report each year from the big three credit bureaus — look for accounts you didn’t open.
Here’s what I do. I get my report from one of the bureaus every 4 months — that way I’m checking my file throughout the year, rather than all at once. To get a free copy of your credit file, use this site: http://www.annualcreditreport.com/ and only this site. It was set up by the federal government for this purpose.
I recently called my bank to close a credit card account that I no longer use. The customer support person told me at least six times that closing a credit card account would appear on my credit report and could harm any attempt to get future credit. I would like to know if what I was told is true. It certainly sounded like this was an attempt to frighten me into keeping that account open.
— Dawn W., Washington State
The fact is, closing a credit account will never boost your credit score and may lower it. But if you have a high credit score and only close a single account — the impact on your credit score should be relatively minor.
However, you didn’t say why you want to close that account. Maybe there’s an economic downside to keeping it open, such as an annual fee or a co-signer who might run up a balance. Maybe you just want to reduce your risk of identity theft. Or maybe you believe, as many people do, that closing old accounts will boost your credit score.
In fact, the opposite is true, and closing your oldest account could actually have negative consequences because it makes your credit history appear to be shorter.
“Generally closing a lot of accounts that you don’t use anymore can hurt your credit score,” says Gerri Detweiler, the credit expert for Everyday Wealth. That’s because it changes your debt-to-available-credit ratio.
Here’s how that works. Let’s say you have $50,000 in available credit and you owe $10,000. If you close a card with a $10,000 credit limit, your available credit drops to $40,000 and your debt-to-available-credit ratio gets higher. To a potential lender, that $10,000 outstanding balance now seems a lot bigger, and giving you a loan seems to be a greater risk.
According to Fair Isaac, the company that developed credit scoring, “having available credit that you don’t use does not lower your credit score.” Fair Isaac also points out that “any late payments associated with old accounts won’t disappear from your credit report if you close the account.” These problems will still show up on your credit report, the company says, “and may be considered in computing your credit score.”
TransUnion (one of the three big credit reporting agencies) advises consumers to keep four to six credit accounts open. “This will keep your credit and debt balances healthy,” they say. “Signs of active and responsible credit use are viewed positively by creditors.”
One more thing. If you are going to close an account, the best way to do that is to send a certified letter to the credit card issuer.