Identity Theft Protection Services – A Needless Expense?
Last week I heard Rush Limbaugh on the radio promoting identity-theft protection services. To be clear, I don’t normally listen to Rush Limbaugh. I was a captive listener in the back of an airport shuttle. But I digress.
Specifically, he was plugging a company called LifeLock, Inc., which paid millions of dollars in 2010 to settle claims of deceptive advertising. Limbaugh’s pitch was a classic ‘scare-and-sell’ advertising strategy, where alarming statistics are used to drive sales. Think of the home-security company that sends you crime statistics in the mail.
But Rush got me thinking. Are these identity-theft protection services a legitimate form of protection? Or are they a waste of money? What do you get in exchange for the monthly fees you pay? And how big of a problem is ID theft, anyway? Let’s take a closer look at these pseudo-services.
What is Identity Theft?
Identity theft occurs when someone obtains personal and sensitive information about you without your consent. This is typically done for criminal purposes. An example of identity theft would be someone using your name and Social Security Number to obtain credit or financing. This is one of the most common ID-theft strategies, though it’s certainly not the only one.
How do thieves get their hands on your identity? According to the Federal Trade Commission, there are many different techniques, with new ones emerging all the time. Here are some of the most commonly used identity-theft techniques:
- Dumpster Diving: The thief rummages through a trash can or dumpster in search of paperwork with sensitive information (hopefully contracting tetanus in the process).
- Phishing: The thief sends you a phoney email and claims to be someone else, such as a bank or retailer.
- Skimming: A high-tech form of ID theft where the thief uses a handheld card reader to ‘swipe’ information from your credit card. This one is mostly used in restaurants and retail settings, where you actually hand the card over to someone.
- Wireless: The thief obtains personal information from your computer by tapping into a wireless Internet connection.
- Organizational: The thief steals information from hundreds or thousands of people at once, by accessing the electronic records of a company that has legally obtained the information. This is commonly referred to as a data breach. A recent example: Utah Department of Health
- Pretexting: The thief obtains your personal information directly from financial institutions or telephone companies, by pretending to be you. The person has obtained the information under a false pretext, hence the name.
- Old School: The thief steals your purse or wallet, or gets lucky and finds a lost purse or wallet. Either way, the result is the same. Some of your personal information is now in the hands of a criminal.
Again, these are not the only forms of ID theft. Technology evolves constantly, giving crooks new ways to access our sensitive information.
Identity-theft protection services cannot stop these things from happening. But they may be able to spot the resulting activity, so you can clean up the mess before it gets any worse. That’s the idea, anyway. We will talk more about these services in a moment. First, let’s look at some identity-theft statistics to see how pervasive this problem really is.
Statistics: How Big is the Problem?
Are the identity-theft protection services worth the money? To answer this question, we need to know two things: (1) How pervasive is the problem? (2) How do these services protect you from ID theft? Let’s start with the first question. Here are some statistics to put things into perspective.
- According to the Federal Trade Commission, as many as 9 million Americans have their identities stolen each year.
- In 2010, approximately 8.6 million households in the U.S. were affected by identity theft. Source: Bureau of Justice Statistics, part of the Department of Justice.
- Consumer Reports magazine reports even higher numbers. In a June 2012 article, they stated that 15.9 million households were affected by identity theft during the previous 12 months. Source: Consumer Reports National Research Center.
- In 2010, more than 64% of the population experienced the misuse, or the attempted misuse, of a credit card. Source: Bureau of Justice Statistics.
- In 2010, government documents / benefits fraud was the most common type of identity theft, making up 19% of all cases reported to the Consumer Sentinel Network. Credit card fraud was the second most common (15%), followed by phone or utilities fraud (14%), and employment fraud (11%). Bank fraud rounded out the top five with 10% of reported cases. Source: Consumer Sentinel Network, a database of consumer complaints from law enforcement and governmental organizations.
- In the United States, 65% of adults are worried about identity theft. Source: Credit.com.
Note: At the time of publication, identity theft statistics for 2011 were not available through these sources.
Putting the Numbers Into Perspective
These numbers can be frightening on the surface. So it’s important to view them in a broader perspective. According to the U.S. Census Bureau, there are roughly 115 million households in the United States. So let’s consider the 15.9 million statistic offered by Consumer Reports in relation to the total population. Based on their data, only 13% of U.S. households were affected by identity theft during the 12-month period when they gathered their data. The other 87% of households were apparently untouched by the problem. Based on these numbers, you can see that there is a statistically small chance you will be affected by ID theft.
And then there’s this. The latest data available to us, from 2010, shows a 27% decline in identity fraud. The financial impact of those crimes has also declined. According to a study conducted by Javelin Strategy and Research, consumer out-of-pocket costs associated with ID theft have actually decreased by 44% since 2004. Consider these trends before you shell out $20 – $30 a month for some kind of ‘protection’ service.
ID Theft Protection: Shield or Scheme?
And that brings us to the question at hand. Do you really need identity-theft protection services? Are they worth they money? And do they protect you from the types of crimes we just examined?
The exact features of an identity-theft protection service will vary from one provider to the next. But most of them monitor your credit reports for unauthorized activity. If and when they spot something amiss, they will send you an alert. Just bear in mind you can check your own credit reports once a year for free.
Some services claim to go above and beyond credit-report monitoring. Experian, for example, says they conduct “daily internet scanning for unauthorized use of your SSN, debit and credit cards.” I can’t imagine why an identity thief would post this information in a public and searchable location online. So the value of this daily scanning is, in my view, questionable at best.
For the most part, the identity-theft protection companies are glorified credit monitors. They do not provide any type of frontline defense against identity theft. They cannot stop it from happening. They simply look for it on the back end, after it has already happened. So in this regard, one could argue that these services don’t really offer any protection at all. Detection would be a better word for it. They merely spot the crime after the fact. Of course, that doesn’t stop them from plastering the words “protect” and “protection” all over their websites.
It’s important to know what you’re getting — and what you’re not getting — when you sign up for one of these services. For instance, most of the so-called protection services do nothing to protect you from theft or fraud relating to (A) tax return filings, (B) account takeovers, (C) misuse of credit cards, or (D) people who obtain a driver’s license or Social Security card in your name.
According to a February 2012 Consumer Reports article, cases of identity theft are declining because financial institutions are doing a better job preventing them. The article goes on to state:
”In the past we’ve found that these protection plans provide questionable value. And some promoters of these services have been slapped by the Federal Trade Commission for misleading sales practices and false claims.” -Source: ‘Debunking the Hype Over ID Theft,’ Consumer Reports Money Adviser, February 2012
Additionally, there are plenty of things you can do to prevent ID theft on your own, without paying for an identity-theft protection service. You can check your credit reports once a year, for starters. If someone has opened a credit account or taken out a loan in your name, it will show up on your credit reports.
You can also sign up for free alerts through your credit / debit card issuer, to be notified anytime a purchase is made over a certain amount. Use your bank’s online tools to keep a close eye on your checking and savings accounts. Take the money you would spend on identity-theft services and buy a shredder for your sensitive documents (this will reduce the risk of ID theft from ‘dumpster divers’).
Most consumer groups seem to be in agreement on this subject. You’re better off protecting your identity with good old-fashioned common sense, rather than paying for an identity-theft detection service.