Free credit scores become more available to borrowers
As of Jan. 1, 2011, federal law broadens consumers' access to scores
By Martin Merzer | Published: January 1, 2011
Happy New Year, and here's your first financial gift of 2011: Beginning Jan. 1, 2011, you have a new right to see one of the most important -- and, until fairly recently, most concealed -- indicators of your creditworthiness. And for free.
Yes, that's right. Your credit score. Without charge.
A federal regulation took effect Jan. 1 that requires credit card issuers and other lenders to provide millions of applicants with the reasoning behind the interest rate assigned to the new credit card or the loan.
This rule applies to anyone and everyone who is assigned an interest rate higher -- even fractionally higher -- than the best rate offered to other consumers.
Bottom line: For the first time, you'll have a legal right to find out why you didn't get a loan on the best possible terms -- and you'll have the information you need to set right whatever has gone wrong with your credit.
"As with most of the consumer legislation passed in the last few years, the rule gives more information to consumers who wish to advocate for themselves and avoid hidden lending pitfalls," said Robert Baker, director of education at Housing and Credit Counseling Inc. in Kansas and the National Foundation for Credit Counseling's educator of the year.
The regulation, a somewhat belated result of the Fair and Accurate Credit Transactions Act of 2003, orders credit card companies and other lenders to provide this information through a so-called "risk-based pricing notice" plus a credit report or with disclosure of the consumer's credit score.
Risk-based pricing refers to the common practice of setting or adjusting an interest rate and other terms of credit based on the applicant's previous credit history (and other risk-related criteria), as indicated by one or more credit reports.
The rather intricate "risk-based pricing notice" can be a bureaucratic nightmare, so nearly all lenders are expected to provide credit scores instead. In almost every case, that will mean that consumers obtain free access to their FICO scores.
The new federal regulation is expected to result in millions of people receiving their FICO scores from lenders.
By far the credit score most widely used in the United States, a FICO score is a crucial indicator of a consumer's creditworthiness, a key component in a lender's decision whether to approve a loan and at what interest rate.
Until a decade or so ago, the score was kept hidden from consumers. "When I first counseled in 1997, consumers rarely received a score and, if they did, they paid dearly for it," Baker said.
Even now, most consumers have to pay -- usually between $7.95 and $15.95 -- to see a credit score, whether from FICO or another credit score provider.
Much of that changed Jan. 1. "The new federal regulation is expected to result in millions of people receiving their FICO scores from lenders," said Craig Watts, a spokesman for FICO, creator of the credit score that bears its name. "Significantly, these are the same credit scores their lenders used when making credit decisions. That gives the scores genuine value for the consumer."
Many of the largest credit card companies responded somewhat vaguely in December 2010 when asked what route they would take -- credit scores or risk-based pricing notices:
- Bank of America: "We'll be in full compliance with the regulation when it goes into effect."
- Discover: "We're continuing to work with the Fed on implementing the new rule and fully expect to comply when it goes into effect."
- Chase: A spokesman for Chase did not priovide an answer to the question.
Baker said that some lenders might opt for the risk-based pricing notice over the credit score or some blend of the two as a "path of least resistance" emerges, but most lenders will simply provide free FICO scores.
(Importantly, this does not apply to applicants who are turned down entirely for a new credit card or other loan. Other relatively new federal rules permit those people to check information on the credit report that was used to deny them the loan.)
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FICO scores can range from 300 to 850. In general, the higher your score, the lower your interest rate. Anything around 800 is considered outstanding. Anything under 600 can get you into subprime lending territory, where you really don't want to be.
Thus, the importance of knowing your score.
"In addition to providing more information, it could provide an insight into lending qualification practices," Baker said. "If a credit score is the most common method of satisfying the risk-based requirement, it also could give consumers a better idea of score benchmarks for loan qualification."
Equally important, if you know what information is being used against you, you can act on it by correcting mistakes in your credit reports -- the building blocks of the credit score.
"In the long term, the most effective strategy for an individual is to focus on the accuracy and completeness of the underlying information in their credit report," Chet Wiermanski, global chief scientist with credit bureau TransUnion, said in testimony before a House Financial Services Committee on March 24, 2010.
"It is the individual's credit activity, rather than any particular credit score, that is key to producing the result -- that is, the exact terms and conditions which lenders and insurers are able to offer to that particular person," Wiermanski said.
Many consumers also now will have the information they need to begin taking steps to improve their actual creditworthiness.
"At a time when nearly 25 percent of all adults with a credit history have a score of 599 or less, this legislation could motivate the consumer looking to rebuild a score following a youthful transgression or economic hardship," Baker said. "The consumer dedicated to building a good credit score will now have another free tool to get the process started."
Said Watts, the FICO spokesman: "People can learn how to manage their credit moving forward so that their FICO score improves over time and they can qualify for good rates in the future."
See related: New rules could provide millions with free credit scores, 10 things you must know about credit reports and scores, How to correct mistakes in credit reports, 5 key federal laws to help protect credit card holders
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