Personal Finance: Credit Scores 411: What you need to know now

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. A couple of changes should have an impact. 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 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. But on July 21, another regulation will shut that loophole. That's when lenders will no longer have a choice in the type of notice they provide. If a credit score is used to deny a loan or give unfavorable terms, the lender must disclose that score to the consumer. The requirement was part of the financial overhaul known as the Dodd-Frank Act last year. Shop Smart Keep in mind that the new rules don't guarantee everyone a copy of their credit score. "The rules affect people who've either been denied credit or applied for credit," said Tom Quinn, credit scoring expert at Credit.com. So consumers who aren't actively seeking a loan -- but want to keep tabs on their credit -- still need to be careful when shopping for a credit score. Experian's homepage, for example, features the eye-catching deal of a credit score for just $1. But read the fine print, and it turns out the offer is a teaser for a subscription that costs $14.95 a month unless it's canceled within a week. Experian also runs the catchy TV ads for its FreeCreditScore.com, which offers a similar "free" deal. All three credit bureaus sell a report and score package for a one-time cost of about $15. But you need to click around a bit on the sites to find the option. Credit scores are also available for $19.95 directly from FICO, the company that develops the most widely used scores. As for credit reports, remember that everyone is still entitled to one free copy a year from each of the credit bureaus. To request free copies of your report from any of the three bureaus, go to www.annualcreditreport.com . Understand Scores Before shelling out for a credit score, note that there's more than one version on the market. As background, lenders rely on two types of scores to gauge a borrower's risk. FICO scores, which range from 300 to 850, are still the predominantly used scores. But VantageScores, which were developed by the three credit bureaus and range from 501 to 990, have gained popularity in recent years too. The type of score you'll get depends on where you buy it. TransUnion only offers the VantageScore on its direct to consumer websites. Equifax sells FICO scores and its Equifax Credit Score, which is also sold to lenders. Experian markets the PLUS score on its homepage, which is an educational score designed to give consumers a sense of where they stand and isn't used by lenders, however. Experian also sells the VantageScore to consumers at http://tinyurl.com/3osbux2 . But there is no link to that page from the company's homepage. Remember that FICO develops a specific formula for each credit bureau, so even the FICO scores you get may differ slightly. Scores can also differ if there are discrepancies in the information provided to each credit bureau. Finally, there are several smaller operations that sell scores based on independent formulas that aren't used by lenders. So if you see an offer for a credit score, be sure you understand exactly what version you're buying. Published: Wed, Apr 13, 2011