New rules could provide millions with free credit scores
See later story: Free credit scores become more available to borrowers
Starting next year, millions of consumers will begin to see a key piece of their financial profiles -- for free.
Lenders will be required in most cases to provide borrowers with either a free credit score or a risk-based pricing notice informing them that their interest rates have been set based on their elevated risk levels. Those requirements follow new rules announced last year by the Federal Reserve and the Federal Trade Commission, which take effect beginning Jan. 1, 2011.
Due to the complicated analysis required to generate a risk-based pricing notice, some experts are predicting lenders will choose to offer the credit score instead, allowing borrowers to get a key portion of their financial profile for free. Once the rule takes effect, "millions of consumers may receive free score disclosures each year from their lender(s)," Chet Wiermanski, global chief scientist with credit bureau TransUnion, said in testimony before a House Financial Services Committee on March 24.
Regulators agree. "Because we believe that many creditors will opt to provide consumers with a consumer-friendly credit score notice, more consumers will get information about their credit scores for free," says Rebecca Kuehn, assistant director with the division of privacy and identity protection at the FTC.
That change would certainly make consumer advocates happy. "If a creditor does elect to supply the consumer with a credit score, and that score includes information on how the score was calculated along with concrete steps on how to improve it, then it potentially could go a long way toward helping consumers improve their financial situation," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "Confusion remains around the credit report and credit score, so helping educate this segment of the population, those who are considered financial risks, would be very worthwhile."
|Click above for a PDF model form for credit score disclosure.
A history of secrecy
While the confusion surrounding credit scores remains, it has lifted somewhat in recent years. "When use of credit scores first became widespread in the mid-1990s, they were completely secret. First, lenders did not inform consumers that credit scores existed or that they were using them. Despite their importance, consumers were not told how they were calculated or who was using them," Evan Hendricks, publisher of the "Privacy Times" newsletter, said in his testimony before the House Financial Services Committee.
Eventually, consumers gained the right to lift that veil -- for a price. In 2003, Congress amended the Fair Credit Reporting Act via the Fair and Accurate Credit Transactions (FACT) Act, requiring the credit reporting agencies (CRAs) to disclose credit scores for a "fair and reasonable" fee. But it didn't go far enough for some advocates. "[T]he FACT Act does not require CRAs to provide consumers with the scores that lenders actually use. Instead, CRAs can disclose 'educational scores,' meaning FICO 'knock-offs' or 'FAKOs,' that approximate scores used by lenders, but which can differ significantly," Hendricks testified.
FICO for free
Most banks prefer to use the FICO scoring model in their lending decisions. The FICO scoring model helps them determine whether to lend money at what interest rate, making the three-digit number a key piece of information for prospective borrowers. However, most buyers must pay to see how they score, with FICO scores primarily available for purchase through two websites: AnnualCreditReport.com, where site visitors can buy them for $7.95, and myFICO.com, which sells the scores starting at $15.95 each. There are also several free ways to obtain FICO scores. In addition to some mortgage applicants, members of the Pennsylvania State Employees Credit Union are among those borrowers provided with FICO scores at no added cost under myFICO's ScoreView program. Other lenders who participate in ScoreView -- which provides free FICO scores to more than 1.5 million consumers -- have asked FICO not to identify them to the media.
The new rule could mean millions more U.S. borrowers get free FICO scores. (Applicants who get turned down for loans wouldn't get free scores or pricing notices, since "adverse actions" such as denials for credit are already covered under the FCRA, which allows consumers to check information on the credit report used to deny them credit.) "The Commission believes that, rather than providing risk-based pricing notices, many entities will provide free credit score disclosures so that they do not have to conduct the analysis necessary to determine which consumers should receive a risk-based pricing notice," said David Vladeck, director of the FTC's bureau of consumer protection, in his testimony before the House Financial Services Committee. Among the major card issuers contacted for this story, Chase said it is mailing customer notices and Capital One said it is still assessing its options, while other banks didn't provide comment on their plans.
The new rules state that the scores will need to be provided in writing as soon as reasonably possible following an application for credit. Auto lenders, for example, could hand a car buyer his credit score in person. If a consumer agrees to electronic disclosures, the lender can opt to supply the free score electronically instead of in writing.
Due to the credit score's popularity, FICO says most banks are likely to provide its product to consumers. "People here have discussed the 2011 risk-based pricing rules with a few lenders. Based on their responses, we believe a popular option with lenders will be the one which provides applicants with a free credit score in lieu of some other type of notification," says FICO spokesman Craig Watts. "Given the number of FICO scores used today by creditors, it seems likely that such credit scores provided free to applicants will be FICO scores."
See related: 5 key federal laws help protect credit cardholders, The rules behind getting a free credit report, 10 things you must know about credit reports and credit scores, How to dispute credit report errors, Free credit reports: How to get the actual free one, The five components of your credit score,
Updated: May 18, 2010