How Credit Monitoring Works

What Is Credit Monitoring?

First, an important clarification: Credit monitoring is not the same as credit reporting.

Credit reporting agencies collect information about your credit history and share it with potential creditors. All of your credit cards, home mortgages, car loans and other lines of credit are listed on your credit report along with your payment history. Every time you apply for a new loan or credit card, the creditor requests a copy of your credit report from one or all of the "Big Three" agencies: Equifax, Experian and TransUnion. These same credit reporting agencies also calculate your official credit score using their own variation on a formula developed by a company called FICO.

Credit monitoring services alert you to changes in the reports and scores generated by credit reporting agencies. To make things even more confusing, all of the "Big Three" credit reporting agencies also offer credit monitoring services.

What exactly do you get if you sign up for a credit monitoring service? You will receive email or text alerts when any of the following changes occur on your credit report [source:]:

  • new accounts opened in your name
  • new credit inquiries from lenders
  • late payments
  • addition of a public record like a bankruptcy
  • new home address
  • new employer

In terms of identity theft, the biggest threat is someone opening a new credit account in your name. New account fraud is harder to fix than standard credit card fraud and can get expensive, too. As we mentioned earlier, only a small percentage of identity theft victims in 2013 had to pay out-of-pocket for fraudulent charges. But for those that did, victims of new account fraud paid an average of $449 compared to $108 for existing account fraud [source: Blyskal].

There are some financial benefits to credit monitoring. For example, most credit monitoring services include an option to track your credit score. The higher your credit score, the more likely you are to get a better interest rate on loans or lines of credit, which will save you money in the long run. Credit monitoring services can offer insight into the factors that influence your score and tips for improving your score over time. Experian's credit monitoring service even includes a simulator that predicts the impact of new loans — mortgages, car loans, etc. — on your score [source: Experian].

Some defenders of credit monitoring argue that the educational value of the services alone justifies their price. Simply being aware of the way your spending and borrowing habits affect your score can lead to higher scores (if you change your behavior) and ultimately save you thousands of dollars in lower interest payments [source: Khalfani-Cox].

Now let's look at what the critics say about the value of credit monitoring services.