By Candice Choi, AP Personal Finance Writer
NEW YORK (AP) — The promise of a free credit score may no longer be a bait-and-switch marketing ploy, as new regulations contained in the Dodd-Frank financial reform bill have changed how the credit reporting scheme works.
A new rule that went into effect in January requires lenders to inform you if a poor credit score resulted in less favorable terms for your loan, such as a higher interest rate. Another rule to become effective this summer will tighten the disclosure requirements so that lenders will have to give more borrowers free copies of their scores.
The regulations are intended to inject some transparency into the decision-making process lenders use to determine interest rates for specific borrowers. But the changes are also creating confusion about the availability of free credit scores, which is a subject that already generates plenty of misinformation.
One reason for the confusion is that consumers often incorrectly use the terms "credit report" and "credit score" interchangeably, notes John Ulzheimer, president of consumer education at SmartCredit.com. And most consumers know they can get credit reports for free."That results in a lot people thinking they're entitled to a free score."
Here's the latest on credit scores:
KNOW YOUR RIGHTS
It's been hammered into most consumers' heads that credit reports are free. Now in some cases, credit scores are free as well.
Under the rule that went into effect Jan. 1, lenders have two ways to meet new disclosure requirements:
One option is to furnish the borrower with a copy of the credit score that was used to make the decision. Consumers should also be provided with the range of possible scores so they understand where they rank nationally. Additionally, the lender must disclose which of the three credit bureaus — Equifax, Experian or TransUnion — provided the score.
However, lenders have another option that doesn't include the disclosure of the applicant's score. The alternative is to provide a letter stating the borrower was given a less-than-favorable rate because of his or her credit risk. This notice must also disclose which credit bureau provided information to the lender.