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FinReg includes free credit scores

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Highlights
  • FICO says more than 43 million people have a FICO score of 599 or less.
  • The free credit scores provision takes effect on a date not yet determined.
  • It isn't evident if insurance companies will have to provide a free credit score.

A small provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act will bring about widespread access to free credit scores. Section 1100F of the financial reform legislation requires credit card issuers, lenders, landlords, utility providers and other companies that reject an applicant or take any adverse action because of the consumer's credit score disclose the actual score used in that decision.

"This is, as far as I know, the first piece of legislation that actually says that you now have the right to see your actual score for free under certain circumstances, regardless of what you've applied for," says John Ulzheimer, president of consumer education for Credit.com in San Francisco. The Fair and Accurate Credit Transactions Act gave consumers the right to request a free annual credit report, but not a free score.

Many people seem likely to see their scores for free, as more than 43 million people have a FICO score of 599 or less, according to recent research from FICO. Those who aren't penalized by their credit rating won't get a free score disclosure.

The rule also applies to situations affecting existing customers when, for example, a card issuer lowers the credit limit or raises the interest rate because of a drop in the person's credit score. In such cases, the account provider must send an adverse action notice that includes the credit score used against the customer.

"As long as an adverse action has taken place, and an adverse action is defined as being an adverse decision based on your credit, then it triggers the requirement," says Ulzheimer.

That adverse action notice must also disclose:

  • The range of possible scores for the scoring model used.
  • Up to four reason codes, or top factors that negatively impacted the score, listed in the order of their effect on the score.
  • The date on which the score was created.
  • Who developed the score.

Access to the score used

"If you're denied credit or if you are offered credit that's less favorable because of your credit report or credit score, you should be getting the credit score that the lender actually used," says Chi Chi Wu, a staff attorney at the National Consumer Law Center in Boston.

In most cases, people will receive a FICO score, says Ulzheimer, who formerly worked at FICO and Equifax, one of the three major credit-reporting agencies. Yet the score could come from a different vendor, such as VantageScore. The disclosure will note which company supplied the score.

Consumers could even see scores not currently available to the public for purchase, including Experian-based FICO scores, FICO 08 scores, and industry-adjusted scores designed for certain loan categories.

"There are different flavors of the FICO score, different variations for specific industries," says FICO spokesman Craig Watts. "It's possible that a consumer could see an auto industry option FICO score from an auto dealer that declines a consumer's loan application."

Yet wild differences in FICO scores aren't necessarily a given, according to Watts. "All these scores are going to be from the same general formula, so there may be variations in the scores, but the same rules of the road apply," he says, in terms of the factors that hurt the score and actions consumers can take to improve their credit score.

More rule making necessary?

The free credit scores provision takes effect on the "designated transfer date," which hasn't been determined yet by regulators. For now, some aspects of this section remain unclear.

For instance, which score should employers disclose to jobseekers denied because of their credit report? Because employers do not check credit scores, it's not clear if a score must be provided.

Ulzheimer doesn't believe so. "This doesn't necessarily affect that transaction because a score isn't used by an employer. It won't trigger a requirement to disclose a score."

In addition, it isn't evident whether insurance companies will have to provide a free credit score. "If an insurer were using a credit report or a credit score, they would use a credit-based insurance score, but that's not the same thing as a credit score," says Watts.

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