June 5, 2016

Buying Identity Protection From Your Credit Card Company?

These days whenever you apply for a credit card, there’s a good chance that the issuing bank will try to solicit you for one or more of the following add-on services, for an extra fee of course:

-          Payment Protection: This will cost you an amount equal to about 1% of your spending. It’s an insurance plan that covers you in the event you can’t make your minimum payments. It may look good at first glance, but after you read the rules and exclusions you will realize it’s hardly a deal.

-          Credit Monitoring: This is another add-on where you will have to pay a monthly fee to monitor your credit report and/or score. However this is also of limited use and I will explain why in a moment.

-          Identity Protection: The funny thing is that this is usually quite similar to the credit monitoring. The difference is it might come with identity theft insurance and a hotline for dealing if you become a victim of fraud.

Costs vs. benefits?

The payment protection almost never makes sense. First of all, the circumstances it covers are quite limited and with most plans, if you use the benefit it only means they will make the minimum payment for you (and chances are, most people can scrounge up the money for the bare minimum anyway).

Furthermore, federal law limits your liability for fraudulent credit card purchases to a max of $50. So when it comes to fraud protection… there’s absolutely no reason to buy it.

The credit monitoring and identity protection don’t make sense to buy together. Why? Because the bank typically sells them separately. For example, one service might cost $12/month and the other might be $12/month. Why would you spend $24 for those when a service such as Identity Guard offers a single plan that includes BOTH services combined for a lower monthly fee.

Who’s best to do the job?

If you owned a Jaguar, would you take it to a Ford mechanic for service? Probably not. Rather, you would want someone who specializes in Jaguar. The same concept applies to identity theft protection. Sure your credit card company may have it as a side business, but a company like Life Lock specializes in it.

For example last year I applied for the British Airways credit card from Chase. The card arrived in the mail and when I called to activate it, they tried selling me on their identity protection plan. While it’s true I love Chase and the British Airways credit card, I would rather use them for what they’re best at – operating an airline rewards card. When it comes to a different service like identity protection, I would prefer to go with a company who is 100% dedicated to that and nothing but that.

Another reason to not go with your credit card company’s plan is that the benefits are usually less than what you would get elsewhere. Take Bank of America’s Privacy Assist as an example. It offers up to $5,000 in identity theft insurance. On the other hand, some Life Lock plans offer up to $1 million of coverage for qualifying circumstances. Who would you rather choose considering both services have comparable pricing?

Credit scores are not created equal

If you want a plan that includes credit score monitoring, it’s important that you understand the following... not all credit scores are the same.

Most identity/credit monitoring services don’t offer you FICO scores. Why? Because during the last few years, FICO has scaled back who they license their product too (currently only FICO and Equifax can sell FICO scores to consumers). Of course this is unfortunate since FICO is the gold standard, but there’s not much anyone can do about it EXCEPT choose the second best option; a monitoring service which uses a scoring model that closely correlates with FICO.

However not all credit monitoring plans use a scoring model that’s useful. What is a good credit score on one type may be bad on another. For example an 800 FICO would be considered great, but if your credit monitoring service is using VantageScore for the formula, then you only have an average ranking.

So what’s the lesson? Investigate the type of model being used before signing up. LifeLock uses a good credit score formula and they have a plan that offers you scores generated from all 3 credit reports (versus plans from credit card companies, which typically only use one credit bureau).

About The Author: Michael is the founder of a popular website, CreditCardForum, where consumers discuss the top credit card offers, as well as the offers which should be avoided!

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