New free credit scores: What you need to know now
There’s an irony about the new credit score disclosure rules issued by the Federal Reserve Board on July 6, and this is it: Would-be borrowers who are most likely to get their credit scores for free are still the people who may find it advantageous to buy their scores.
The borrowers who won’t get their scores may find they don’t need to buy them, either.
That’s because the rules require lenders to supply potential borrowers with their scores if they are denied credit or offered less favorable terms because of those scores. Starting on July 21, scorned applicants for credit cards, student loans and auto loans will see their scores.
But learning after you apply for a loan that there was a problem with your credit score isn’t that much help, is it? People who know that their credit reputation may be marginal will have to figure out a way to get their scores early enough that they have time to nudge them up before putting in those loan applications.
Here’s what you’ll need to consider as the new rules become effective:
If you get a score, it isn’t necessarily bad news.
Some lenders may opt to send score reports to all of their applicants, because that is a less complex way to comply with the regulations, said Nessa Feddis of the American Bankers Association. So simply getting a score report won’t necessarily indicate that you received a worse deal than any other applicant.
Your credit report may be more important than your score.
You already are allowed to get your credit report for free, and that’s where all the important facts of your credit history are located. The data in your credit report provides the basis for those credit scores. Everyone should regularly check their credit reports regularly, to make sure they are error-free. To do that, go to the official website, AnnualCreditReport.com. There you’ll find links to your reports at the three big credit reporting agencies: Experian, Equifax and TransUnion. If you’re getting ready to borrow big — say buy a car or refinance your home — get all three at once. If not, you may find it more useful to get one every four months, rotating, because you’re allowed one free peek a year at each one.
You may not need to buy a score.
If you’ve always had a good credit history and there are no problems with your credit reports, you may not even need to get your credit score, suggests Tom Quinn, a scoring expert with Credit.com. But if you’ve got a big purchase coming up and you want to make sure your score is as high as it could be, buy a copy of your score about two or three months ahead of time. That will give you enough time to make some moves, like paying off credit card debt, to bump up your score.
It’s important to get the right score.
There are a lot of different credit scores. The new disclosure rules require that lenders share the identical scores that they use in their decisions. So, if a lender is using a proprietary score or a specialized auto or education loan score, that is the one they’ll have to send to a spurned applicant.
As part of the implementation of the Dodd-Frank financial reform legislation, federal regulators are studying how well credit scores relate to each other and reflect real risk. According to FICO, the company credited with inventing credit scoring and still the industry’s 500-pound gorilla, officials from the soon-to-launch Consumer Financial Protection Bureau are looking at the wide variance in scores from different companies. With 90 of the largest financial services companies, 25 of the largest card issuers and 25 of the largest auto lenders using FICO scores, it may behoove would-be borrowers to buy those particular scores at the MyFico website. (Another reputable — though less widely used — credit score called the VantageScore, was developed by the three credit-reporting agencies and can be purchased at the Experian website.)
There are other websites that sell scores and give them away for free. Most of those scores are not official or necessarily used by many lenders, but some of them are close enough to FICO scores to be useful as approximations for consumers who just want a rough idea of how they are doing. If that’s all you want, get scores from a site that is truly free, such as CreditKarma. After all, why pay for a score that nobody’s using, when — soon enough — you may get your actual scores in the mail?