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What is credit monitoring and does it protect you from fraud?

Credit monitoring services boast the ability to safeguard your credit, but do they really? Here's what credit monitoring does and doesn't do.

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With fraud on the rise, many people have turned to credit monitoring as a safeguard against identity theft.

Credit monitoring services notify you of changes made to your credit reports so you can take action against potential misuse of your personal information. If you've been a victim of fraud or simply want to be proactive, you may consider signing up for one of these services to help you stay on top of any changes to your credit file.

But there are some limits to what these services offer, and it's important to understand how they work before you sign up for a program, especially if you're paying for it. 

Below, CNBC Select breaks down everything you need to know about credit monitoring so you can decide what service is right for your needs. 

What credit monitoring does

Credit monitoring services do just what the name says — monitor your credit. They track the credit history shown on your credit report, then alert you of changes via email, text or phone. Granted, you can do this on your own, but these services provide an automated and faster way to track changes to your comprehensive credit file.

The exact activity reported by your credit monitoring service varies by provider, but it may include the following:

  • Hard inquiries on your credit report, such as someone applying for credit in your name
  • New accounts opened in your name
  • Balances and payments on your credit products
  • New address or name changes to your credit file
  • Public records, such as bankruptcies
  • Personal information on the dark web, such as your social security number, email address and passwords

It may seem like credit monitoring services keep track of a lot, but these tools have their limits. Below, we explain where credit monitoring falls short.

What credit monitoring doesn't do

While credit monitoring is a great tool to spot potential signs of fraud, it's not a holistic approach to preventing identity theft or unauthorized transactions.

When you sign up for credit monitoring, you'll receive alerts and resources to help you identify and protect against possible theft, but these services can't actually guarantee fraud prevention. At best, they keep you instantly informed so you can take action as you notice something is off. 

Here are several things credit monitoring doesn't do:

  • Stop someone from applying for credit and opening new accounts in your name
  • Keep your information safe from data breaches
  • Prevent your credit card from being skimmed
  • Tell you if someone withdraws money from your bank account
  • Warn you if someone files a tax return in your name and collects your refund
  • Stop phishing emails
  • Report fraud
  • Fix credit report errors
  • Freeze your credit

If you want to protect from these types of fraud and others, check out our tips at the end.

Paid vs. free credit monitoring

There are a number of paid and free credit monitoring services that can help keep track of your credit.

Due to a number of high-profile data breaches — notably Equifax in 2017 and Capital One in 2019 — many Americans qualified for free credit monitoring services. But if your personal information wasn't exposed during a data breach, and therefore you're ineligible for the mandated free credit monitoring, there are alternative free resources available, as well as paid options to consider.

Keep in mind, just because a service requires you to pay doesn't necessarily mean it's better. To determine the best service for your needs, review a variety of options to see what is and what isn't offered.

For instance, Experian offers two credit monitoring services: CreditWorks℠ Basic and CreditWorks℠ Premium. The Basic plan is free to use, while Premium currently costs $4.99 for the first month then $24.99 per month.

Both plans provide different services. The Premium plan offers a more extensive monitoring service that checks credit reports from each credit bureau (Experian, Equifax and TransUnion) versus the Basic plan, which only looks at Experian. This is a pretty major difference, since it's a good idea to monitor all three credit reports because the information on each report can differ. 

In addition, the alerts you receive with the Basic plan only include new credit inquiries and new accounts — not balance changes, credit utilization, dormant accounts and other features offered with Premium. In this case, if you want a comprehensive credit monitoring service, the Premium plan would be the better choice.

How to protect yourself from fraud

Credit monitoring alone isn't a comprehensive way to protect yourself from fraud — but if you sign up for credit monitoring while taking additional actions, you can further protect your finances. Here are some tips:

  • Freeze your credit reports: Credit monitoring isn't the same thing as freezing your credit. If you want to ensure that all of your reports are inaccessible to fraudsters and new accounts can't be opened in your name, freeze your credit reports with each credit bureau. While credit monitoring may charge a fee for tracking your credit history, freezing your credit is free.
  • Monitor your credit: Even if you freeze your credit, you should still regularly check your credit reports. You can now receive free weekly copies of your credit report from each of the three bureaus. In addition, check your credit score and credit card accounts for any unexpected information or transactions. If you notice anything out of sorts, dispute errors ASAP.
  • Be wary of advertisements, emails and spam phone calls: You may receive what seem like great deals or limited-time offers that require you to act fast, but you should verify they're legitimate before clicking or sharing any personal information. If you don't know the company or sender of an email or who's calling on the phone, that can be a red flag. Look up the information online and make sure you only go to sites that are "https" — with the "s" representing secure.
  • Secure your information: Make sure any personal information isn't accessible to strangers. Consider storing passwords in a secure app versus writing them on a piece of paper and locking your social security card in a safe.

While there's no way to completely prevent fraud, rest assured that many credit cards, such as the Citi® Double Cash Card and the Blue Cash Preferred® Card from American Express, offer $0 fraud liability. That means you won't be held liable for unauthorized charges on your account when you catch them early and report them.

For rates and fees the Blue Cash Preferred® Card from American Express, click here.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.