What is Credit Freeze? It's Benefits and Drawbacks.
16 May 2024 4 mins Credit Cards
Determining your eligibility and terms for loans and credit cards heavily relies on your credit score and report. However, these can be vulnerable to identity theft and fraud if your personal and financial information is compromised. To protect your credit file from unauthorized access and misuse, consider implementing a credit freeze.
What is a Credit Freeze?
A credit freeze, also known as a security freeze, restricts access to your credit reports, preventing potential lenders from viewing your credit history and approving new credit applications in your name. This measure helps prevent identity theft and fraud, safeguarding your credit score.
A credit freeze differs from a credit lock, another feature offered by some credit bureaus. While a credit lock also restricts access to your credit file, it is more convenient, allowing you to lock and unlock your credit anytime via an app or online account without a PIN or waiting for confirmation. However, credit locks may not be as secure and may come with a fee or require a subscription.
How Does a Credit Freeze Work?
In India, four major credit bureaus—CIBIL, Experian, Equifax, and CRIF High Mark—collect and maintain your credit information. Each bureau has its process for placing or lifting a freeze on your credit report. You must contact each bureau separately to freeze or unfreeze your credit.
Upon placing a freeze, the bureau provides you with a unique PIN or reference number to remember. You'll need this PIN to lift the freeze later. You can choose to lift the freeze temporarily or permanently and specify which lenders you want to allow access to your credit file.
A credit freeze does not block access to your credit file completely. Existing lenders, government agencies with a court order, collection agencies, and yourself (when requesting your free annual credit reports) can still view your credit history. It also doesn't affect your existing credit accounts, meaning you can still use your credit cards and loans, such as your HDFC credit card, but you must continue making timely payments.
Advantages and Disadvantages of Freezing Your Credit
Advantages:
- Protects your credit file from identity theft and fraud by blocking new credit inquiries in your name.
- Safeguards your credit score by preventing unauthorized hard inquiries.
- Free of cost and does not expire until you lift it.
Disadvantages:
- Can be inconvenient and time-consuming to place and lift a freeze with each bureau separately.
- Limits access to new credit opportunities, requiring you to lift the freeze before applying for any loan or card.
- Can cause delays or complications in verifying your identity or creditworthiness for renting an apartment, getting a job, or opening a bank account.
Example of Credit Freeze
Consider Meera, who wants to apply for an HDFC credit card. With a freeze on her credit reports with all four bureaus, here's what happens:
- HDFC Bank tries to access Meera's credit history, but the bureau denies the request due to the freeze.
- HDFC Bank informs Meera they cannot process her application without her credit report.
- Meera contacts the bureau to lift the freeze temporarily for HDFC Bank, providing her PIN and verifying her identity.
- The bureau lifts the freeze for a specific period, allowing HDFC Bank to access Meera's credit history and process her credit card application.
- After the period, the bureau automatically restores the freeze.
Bottom Line
Safeguarding your credit file and score from identity theft and fraud can be effectively achieved with a credit freeze. However, it also has disadvantages that may affect your ability to access new credit and services. Consider the benefits and drawbacks before opting for it, and regularly monitor your credit reports. This practice will help you maintain your credit health and security, whether you're using an HDFC credit card or any other financial product.
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