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Identity Theft Protection is undoubtedly important. However, many consumers have wondered whether Credit Monitoring services offered by Third Parties are worth the cost. Most times, such cost varies anywhere between $8 and $15 per month, depending on provider, and type of service. One-Bureau Credit Monitoring is typically under $10 per month, while Three-Bureau Credit Monitoring is typically between $12 and $15.

Consumers often decide that the odds of becoming an Identity Theft victim are too small (such assumption is wrong as there is a likelihood of as much as 3% or more of becoming an Identity Theft victim in a given year), and do not justify the cost. Others decide that examining one free annual Credit Report suffices. In this article, we attempt to calculate the risk-adjusted cost of becoming an Identity Theft victim, and compare such cost to the cost of Credit Monitoring.

According to an article published by the Boston Globe on February 2, 2007, Javelin Strategy & Research estimates that consumers spend on average about $535 in out-of-pocket expenses to clear up fraud. Multiplying such figure by the 3% likelihood of becoming a victim, the risk-adjusted annual cost is $16.05, or $1.34 per month. Such cost is substantially lower than the cost of Credit Monitoring, however such analysis is incomplete.

It is also reported that Identity Theft victims spend an average of at least 40 hours to clear their name. What is the risk-adjusted cost of such time spent? The U.S. average GDP per capita for 2006 is about $43,500. Assuming a 52-week year, that translates to $837 per week. Assuming 40 hour workweek, that translates to a risk-adjusted cost of 3% x $837 = $25.10 per year, or $2.10 per week. Hence, total cost for out-of-pocket expenses, as well as cost of time spent is $3.44 per month, still substantially less than the cost of Credit Monitoring. However, such analysis is still incomplete.

Victims of Identity Theft incur at least two additional costs: A- Emotional Cost and B- Opportunity Cost. Such costs are hard to calculate, but we will try to devise a logical methodology for such calculation. Emotional cost can vary, depending on the resulting experience from becoming an Identity Theft victim. We will allocate such experience under three different categories: A- emotional stress from privacy violation, B- emotional stress for being shortly mistaken for a criminal, C- emotional stress for being severly mistaken for a criminal.

All Identity Theft victims will suffer from privacy violation emotional stress. Let's assume that a victim's mind is pre-occupied with such stress for an entire year, for an average of 2 hours per week. Using weekly GDP per capita data, the risk-adjusted cost of such stress would be (3%)x(2/40) x 52 x $837 = $65.29 or $5.44 per month.

In addition, let's assume that 0.1% of Identity Theft victims are shortly mistaken for a criminal, possibly facing questioning by police, or even being wrongly handcuffed. How much are you willing to pay in order not to be falsely placed in handcuffs? Let's assume a generous compensation for such trauma is $100,000 The risk-adjusted cost for this category becomes:
(0.1%)x(3%)x$100,000= $3 per year, or $0.25 per month.

(3%) x (0.001%) x $10,000,000 = $3.00 or $0.25 per month.