Paying for ID Theft Protection Is Not Necessary

Fear of identity theft has spawned a huge industry of protection-related products. But you can do a lot of the same things on your own without paying a fee.

For instance, credit bureaus and others pitch expensive credit-monitoring services on their Web sites. "We don't feel that credit-monitoring services are worth it," says Paul Stephens, of the Privacy Rights Clearinghouse.

Stephens points out that putting a fraud alert on your account entitles you to a free copy of your credit report from each of the three credit bureaus every 90 days. Add in the free annual reports you can get from each bureau at www.annualcreditreport.com, and you're entitled to 15 free credit reports every year. And if you really want protection, says Stephens, the best thing you can do is limit access to your credit report with a security freeze.

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In many cases, identity-theft insurance is also a poor investment. Some policies tout $10,000 or $20,000 of identity-theft reimbursement. But, says Stephens, "the out-of-pocket costs for ID theft are usually quite small." You're liable for only $50 in unauthorized credit-card charges, and that's usually waived. According to a Federal Trade Commission study, in more than 50% of the cases, victims incurred no out-of-pocket expenses for ID theft.

The biggest burden is the time you spend fighting back. In that same FTC study, the median amount of time spent resolving ID theft was four hours. And 10% of the victims spent more than 55 hours resolving their problems.

Some policies include identity-theft-resolution services, which provide experts to do the legwork for you. But before signing up, ask about how much personalized assistance you're actually going to get.

Make sure the policy helps resolve medical, criminal and employment-related issues -- in addition to dealing with lenders -- and addresses the expense of hiring a lawyer if necessary. "That's what you want the insurance to cover," says Christine Nielsen, assistant attorney general in the Illinois consumer-fraud bureau.

You may already have some protection. Some banks, such as Washington Mutual, automatically provide ID-theft insurance to checking-account holders. Some insurers, such as Chubb and Fireman's Fund, include ID-theft coverage in their high-end homeowners-insurance policies. And you can get free help from the Identity Theft Resource Center, the Privacy Rights Clearinghouse and the attorney general's office in some states. Illinois has an ID-theft hotline, for example, and can help residents resolve problems; see www.naag.com for a link to your state Web site.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.