New rules for credit score disclosure do not elimnate confusion…
Consumers have been entitled to annual, free credit reports from the three credit reporting agencies for several years. Credit applicants who were denied were allowed to get a free copy of their credit report, but not their actual credit scores. Unless a copy of their report was required for a mortgage, most consumers never receive a ‘free’ credit score, but pay up to $20 for a score. And for those who received a report, it may not have been the one used, as there are different scores for car loans, mortgages, insurance and credit cards. In addition, the three credit reporting agencies sell scores to consumers that aren’t FICO scores.
But beginning January 1st, lenders must either tell consumers who apply for credit exactly which score they used or provide a letter explaining how they came to the decision using the consumer’s credit reports, if they didn’t receive the best terms available. And then on July 21, 2011, the Dodd-Frank financial overhaul law will make it mandatory for credit scores that a lender used to be fully disclosed to consumers who are negatively impacted by their credit score; for example, when a loan isn’t approved or employment is denied.
Credit scores are calculated using credit report information to provide a prediction of a consumer’s financial status. It impacts all areas of finance – mortgages, loans, credit cards, etc. But the effort to provide more clarity may instead lead to more confusion and here’s why:
- Lenders do not divulge how your credit score affects their decision. Knowing which score was used for a loan or credit application won’t show how that information was applied. The best rates and cutoff for FICO scores varies by company with some using a range of 740-500 while another lenders range is 760-620. In addition, there may be several interest rate levels for mid-to-low scores.
- Negative actions that affect your score remain unclear. Some financial activity that impacts a credit score is plain common sense. But there are some behaviors that are questionable. For instance, how many inquiries are too many? Or, if you pay your balance in full each month, you would naturally assume that you aren’t showing a balance. But lenders don’t report the real-time balance that you see online. They report the amount that you owe at the end of your billing cycle, which may be before you’ve paid the balance off. And if you use your credit cards heavily to take advantage of reward offers, you could be penalized, even if you pay the amount in full every month.
- Discrepancies between the scores lender and consumer receive. Requesting a free credit report will not help consumers monitor their own score, unless they receive the exact score that lenders are using. The only way to minimize the difference is by securing your score as near the time you will apply for credit as possible.
For a free copy of your credit report, please visit AnnualCreditReport.com
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