Should Borrowers Get Free Credit Scores?

It used to be that credit reports were secret and hidden, information buried so deep in creditor vaults that few people could find out what they contained -- or if what they contained was accurate.

All of that changed with the passage of several federal laws designed to open up the credit reporting system. Today you can get a free credit report every 12 months from each of the three major credit reporting agencies by going to AnnualCreditReport.com. You can also get a free report if credit or a job has been denied because of a report.

As a borrower, it's in your interest to check your credit standing. The Consumer Financial Protection Bureau (CFPB) says that in 2011 the three major credit reporting services received 8 million dispute requests claiming that report data was incorrect or out-of-date.

For instance, a friend recently looked at her credit information and found that borrowing by someone with a similar name had been added to her report. Because the major credit bureaus now accept documentation by uploading, mail, or fax, the matter was easily resolved without costs or conniptions.

Had it stayed on her report, her score and credit standing could have been reduced or even impaired. The result might have been a higher mortgage rate or possibly an outright loan denial.

Credit Reports versus Credit Scores

Credit reports and credit scores are different. Credit reports show how an individual has used credit, it's a history of financing activity. A credit score is different: It evaluates credit activities and represents them mathematically. Creditors can then look at the scores to see if a prospective borrower meets given standards. As an example, one lender might make a car loan to someone with a credit score of 600 while a second lender could have a 640 minimum.

Because of requirements under Dodd-Frank, mortgage lenders today routinely supply free credit scores to mortgage applicants. In addition, several credit card companies have begun to provide credit scores at no charge with monthly statements.

It's an approach CFPB Director Richard Cordray endorses. In a February letter to creditors, he said that he "strongly encourage you to make the credit scores on which you rely available to your customers regularly and freely, along with educational content to help them make use of this information. We will consider this to be a 'best practice' in the industry. Doing so through existing channels, such as including credit scores with other on-line account information and on monthly statements, is likely to yield positive returns that outweigh the limited effort involved. Customers who monitor and manage their credit standing may be less likely to become delinquent or to default."

There's been a lot of friction between the CFPB and some in the financial sector, but the wider availability of credit scores seems like an issue which will not generate much opposition. Mortgage lenders already provide credit scores on a routine basis and now several credit card companies have begun the same practice. With scores in front of them, borrowers will know where they stand in terms of their credit status and if they suddenly see a big change they'll know to check their credit reports for errors, outdated stuff and maybe even identity theft. The net result may well be fewer losses for creditors because it will be easier to spot mistakes and mischief.

All in all, not a bad idea.

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