For years if consumers wanted to know their credit score, they had to buy it. But starting this year, potentially millions will be able to get their score for free thanks to new federal regulations.
Moreover, the score will be the actual one used to determine a consumer's creditworthiness — not one of the knock-offs offered online that can be off by dozens of points.
"Knowledge is power," says Ed Rice, general counsel for Zoot Enterprises, which provides software to help financial institutions make credit decisions. "If you know what your score is, you have the ability to affect that score and put yourself in a better position. That can only be good for the consumer."
Credit scores have taken on enormous importance because lenders, insurers, retailers, utilities and others use them to make quick decisions about doing business with us and under what terms. Two regulations that take effect at different times this year will provide free scores for those who are negatively affected by their number.
The first regulation, part of the Fair and Accurate Credit Transactions Act of 2003, kicked in Jan. 1. It applies to lenders such as banks and auto finance companies that extend consumer credit and base their decisions on information in credit reports, or so-called risk-based pricing.
If consumers don't receive the best terms available, the lender must send them a notice of this and tell them where they can get a free copy of their credit report, a rundown of your credit history but not your score.
The formula to determine who receives these notices is complex. Alternatively, lenders can just provide free scores to everyone applying for credit along with information on how they compare to other consumers. Many lenders are expected to take this easier path.
The second regulation, a provision in last year's financial reform law, takes effect July 21 and goes further. Anyone using a credit score and taking adverse action against you — denying credit or giving less favorable terms — must provide the number to you. This is expected to apply to a variety of score users, from credit-card issuers to utilities.
Some consumers are already getting free scores and benefiting from it.
Peter Kitzmiller, president of the Maryland Automobile Dealers Association, says auto dealers that arrange financing have been providing free scores to applicants.
Most people with bad credit know that and expect to pay more for a loan, Kitzmiller says. But a couple of dealers reported cases where customers discovered they had lower scores than they thought because of errors on their credit report, he says.
Ever since scores became available for purchase a decade ago, companies have pitched all sorts of scores and related products. You can buy a score for around $20, or pay $15 or more a month for scores, credit reports and other services. Sometimes these scores are for educational purposes only, and not the ones used by creditors.
Critics argue some of those scores can be misleading because they can differ significantly from the one used by a lender. That's why credit experts applaud the new regulations.
"This is huge to get a peek … of the score that lenders are actually using," says Gerri Detweiler, personal finance expert with Credit.com.
Will free credit scores be bad for those in the business of selling the numbers?
Not necessarily so, says Craig Watts, a spokesman for FICO, which produces a widely used score and sells it to consumers.
One billion consumers are expected to apply for credit this year, and about half will receive their score under the rule taking effect this month, Watts says. And half of them will be seeing their score for the very first time, he says.
Watts predicts many of them will want to learn more about improving their score and will become customers.
Improving your credit score
If you receive a free score this year, it will be because a creditor is offering you less favorable terms or even denying you a loan. To improve a score:
•Pay bills on time. Payment history accounts for about one-third of a FICO credit score.
•Maintain low credit card balances. FICO recommends keeping balances below 10 percent of credit limits.
•Don't open loads of credit cards that you don't need.
•Review credit reports annually to make sure they're correct. Scores are derived from information in reports, and errors can drag down a score.