In a move that will strengthen consumer rights and industry transparency, the Federal Reserve and the Federal Trade Commission recently proposed the implementation of rules that will provide millions of consumers free access to their credit scores.
These rules, originally set forth in last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act, require that lenders give consumers free access to their credit scores if this information results in the denial of credit, a change in the terms of an existing agreement, or approval for an interest rate that is materially higher than the best rate available from a particular lender.
Lenders have been required to give consumers access to credit reports under these conditions since Jan. 1, and the Fed’s proposal merely stands to bring credit scores into the fold—a move which industry experts applaud.
“As things are now, many consumers approach loan and credit card applications as if they’re playing the lottery,” said Odysseas Papadimitriou, founder of the personal finance website WalletHub.com. “They apply en mass, thinking that someone is bound to approve them. However, all they typically get is a further distressed credit score. Free access to credit reports and scores will help people understand the connection between credit standing and the terms of financial products and will lead, in turn, to consumers making more savvy financial decisions. The bottom line is that consumers need to know how they’re being evaluated and why certain lending decisions are being made.”
The Fed seems to agree, choosing to propose the implementation of these rules now rather than wait for the Consumer Financial Protection Agency to gain authority on July 21, 2011. The proposed rules are to apply to any entity using consumer credit reports or credit scores in their decision making. Therefore, organizations ranging from banks to credit card companies to insurance agents to landlords will be forced to act with transparency in making risk-based pricing decisions.
Many companies review applicants’ credit information as a matter of course, considering credit histories and credit scores as indicators of financial responsibility. As a result, a low credit score or the existence of negative information on a credit report could lead to a person being turned down for a loan or a credit card or being charged high fees and interest rates.
Free access to such information will help consumers identify mistakes that may have led to decisions regarding their fiscal responsibility as well as avoid future applications for financial products they are unlikely to be approved for. Both of these abilities will help prevent unnecessary credit score damage.
These proposed rules continue the trend of proactive regulation illustrated by the Fed since the passage of the CARD Act. Since this time, the Fed has acted swiftly to close loopholes within that law. One notable proposal calls for credit card companies to evaluate consumers based on individual income rather than household income.