U.S. consumers denied a credit card or auto loan will be entitled to free copies of their credit scores starting today.
The Dodd-Frank financial overhaul law passed last year expands credit-score disclosure rules and places the responsibility on financial companies to provide the numbers. It also forces lenders to give free scores to consumers who don’t get the best rates when borrowing, a practice known as risk- based lending.
“The purpose for the law was to provide consumers with greater access to and information about their credit scores,” Senator Mark Udall, the Colorado Democrat who proposed the provision, said in an e-mail. “By seeing the clearest picture possible of their personal finances, consumers can actively work to improve their scores,” Udall said in a statement earlier this month posted on his website.
The rule applies to financial-services companies that use scores to make loans. The most common scores are based on models established by Minneapolis-based FICO, formerly known as Fair Isaac Corp. (FICO), which are used to gauge a consumer’s financial health. The numbers, which range from 300 to 850, affect the ability to get mortgages, credit cards and insurance products, as well as the rates borrowers pay for them. Under current laws, all consumers are entitled to free annual credit reports, not their actual scores.
CFPB Report
“The law will affect credit-related transactions that occur tens of thousands of times every day,” said John Ulzheimer, president of consumer education at Costa Mesa, California-based SmartCredit.com, which offers consumers credit scores, monitoring and identity protection. It’s “something consumers have wanted and have not had the ability to execute for near 50 years now since credit scoring has been used.”
The rule also requires that a credit score be accompanied by the four main reasons why the number wasn’t higher, such as delinquent accounts, Ulzheimer said.
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The Consumer Financial Protection Bureau, which begins formal operations today, is responsible for ensuring that lenders comply and give consumers who are denied credit or don’t get the best rates free scores. President Barack Obama nominated Richard Cordray earlier this week to head the bureau, which was created by the Dodd-Frank legislation. Jen Howard, a spokeswoman for the CFPB, declined to comment on the credit disclosure law and how it will be implemented and enforced.
Consumers may be unaware of the variety of credit scores available and may purchase a score thinking it’s their only “true” score, according to a report released July 19 by the CFPB. This could negatively impact them “if the credit scores the consumer buys give a substantially different impression of his or her credit risk than credit scores that a lender would use,” the report said.
Customer Notices
When Capital One Financial Corp. uses a credit score to determine an interest rate or decline an applicant, it will disclose the score in a notice to the consumer, said Pam Girardo, a spokeswoman for the McLean, Virginia-based bank.
Wells Fargo & Co. (WFC) said it had plenty of advance notice about the rule and was able to implement the necessary changes to provide scores, said Erin Downs, a spokeswoman for the San Francisco-based bank.
JPMorgan Chase & Co. (JPM), the second-largest U.S. bank by assets behind Bank of America Corp. (BAC), is “prepared to support new regulatory disclosure requirements,” said Steve O’Halloran, a spokesman for the New York-based bank.
American Express Co., the biggest credit-card issuer by purchases, will be disclosing credit scores and related information in notices when a score is used to decline an application for a credit or charge card, reduce the account limit or cancel the account, said Leah Gerstner, a spokeswoman for the New York-based company.
Custom Scores
Since 2004 mortgage lenders have had to provide credit scores to borrowers who are turned down, said SmartCredit.com’s Ulzheimer.
It’s unclear whether the rule also will apply to so-called custom credit scores used for non-lending, such as renting an apartment or purchasing insurance, according to Chi Chi Wu, an attorney at the National Consumer Law Center in Boston. Landlords and insurance providers may use custom scores derived from credit reports, which may not be covered by Udall’s provision.
Any lenders that use traditional FICO scores, such as student-loan companies or credit-card issuers, will have to supply scores to consumers, said Ulzheimer. The score is used by 90 of the 100 largest U.S. financial institutions, according to FICO’s website.
Wrong Assumption
A FICO score of 760 is considered an “elite credit score,” according to Ulzheimer, who said that any number at or above that figure would likely mean a borrower gets the best interest rate offer.
The average rate for borrowers with credit scores of 700 for a 5-year new car loan is 5.48 percent, yet those with scores of 700 or better can shop around and qualify for rates as low as 2.5 percent, said Greg McBride, senior financial analyst for Bankrate.com, the North Palm Beach, Florida-based website that tracks bank products.
Some consumers incorrectly expect that they’ll get their credit scores when obtaining their free annual credit reports at annualcreditreport.com, according to Liz Weston, author of “Your Credit Score.” Consumers can receive free copies from each of the nationwide credit bureaus, Equifax Inc., Experian Plc and TransUnion Corp., once every 12 months.
“People assume their credit scores are free because they get free annual access to their credit reports, and they don’t understand the difference between the two,” she said. A credit report contains information such as borrowers’ addresses, public records and payment history.
‘Right Step’
Consumers who aren’t entitled to free credit scores under the rule will have to pay $19.95 on myFICO.com for a FICO credit score and report.
Giving some consumers free credit scores is “a step in the right direction” toward transparency in consumer finance, said Udall, the Colorado senator.
“We already require that consumers be provided a free annual credit report,” he said. “I think we ought to go all the way and allow consumers to access their credit scores for free as well.
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