Credit Scores Disclosed for Free Starting Tomorrow ...

but only when you suffer an adverse action based on a credit report, such as when your credit application is denied.

Starting tomorrow, July 21, 2011, the latest amendments to the Fair Credit Reporting Act go into effect.  The new amendments require lenders or other users of credit scores to include those scores on their adverse action letters they send consumers who suffer the adverse actions.  The publication of the score will be in addition to the reasons for the adverse action and the identity of the consumer reporting agency whose report was used in the decision to deny credit already required to be part of the adverse action letter.

This is a helpful change to the law.  Before, consumers would only know what score was assigned to them during a credit application if litigation resulted and the lender's files were subpoenaed.  Scores purchased even thirty seconds later from the consumer reporting agency could bear little resemblance to the score used in the adverse action, since lenders often use their own credit scoring models, which differ from the credit scoring models used by the CRAs.  If you do buy a score, buy it directly from FICO, as that's the scoring model most lenders use.

New FICO scoring model may do more harm than good

From PRWeb.com:

New changes to the FICO® credit scoring model, dubbed FICO® 08, were recently made available to all three major credit bureaus (Experian, Equifax and TransUnion). While some are touting these changes as a win for consumers, Lexington Law®, a consumer advocacy law firm, cautions that FICO® 08 may instead cause millions of credit scores to decline.
Used by lenders to assess credit risk, credit scores are derived through statistical analysis of the information in a credit report. The FICO® scoring model translates this data into a single 3-digit number ranging from 300-850. Lenders use this number to determine whether a borrower is likely to repay his or her debts.

This new scoring model has received positive publicity because it excludes minor missed payments from negatively affecting credit scores. The model docks fewer points from credit scores for charged-off accounts of less than $100 and for isolated 30-day late accounts.

Some, however, believe that FICO® 08's scoring model does little for consumers.

"The industry is hyping FICO® 08 as a great thing for consumers because of the way the new scoring model reports some late payments" says John Heath, directing attorney for Lexington Law Firm, "However, no one has blown the whistle about how few consumers will benefit from the new model and how small of a benefit those few will actually receive."

"After all, isolated late payments and small accounts don't represent the bulk of the negative items found in consumer credit reports; a large number of collection accounts are for far more than the $100 threshold FICO® 08 uses. Additionally, those few consumers who have these types of mildly delinquent accounts may not see any scoring increase, because the prior scoring model already considered that a collection account might be isolated and for only a small amount."

A potentially more significant change, that has incidentally already received some negative publicity, is the increased weight placed upon credit utilization: FICO® 08 is more sensitive to the percentage of available credit consumers are currently using. This change will likely affect millions of Americans who carry higher or even maxed-out credit card balances. Those Americans may experience immediate reductions in their credit scores.

Recent economic conditions, during which credit card companies have reduced credit limits or canceled cards outright, has compounded this problem for consumers. FICO® 08's increased emphasis upon credit utilization means that consumers whose credit limits were reduced are more likely to experience greater credit scores reductions than they would have seen under the previous scoring model. Simply put, with the new scoring model, lenders are far more likely to view consumers who have had their credit card limits reduced as greater lending risks.

"Credit utilization ratios have a place in the credit scoring model, but to place more emphasis on this factor in today's economy is problematic," added Heath. "With today's strict lending requirements, even some very creditworthy consumers must pay higher interest rates because of their credit scores, resulting in higher profits for credit card companies and other lenders. With FICO® 08, credit card companies have more power over consumer credit scores. They can lower their customers' credit scores by simply reducing their credit limits."

Free credit score at quizzle.com? No, not really

Quizzle.com is getting a lot of buzz lately, particularly after being mentioned by Clark Howard as a place consumers can get their credit score for free.  While consumers can purportedly get a free credit score once every six months, the problem is that its not a credit score that actually used by lenders. 

In other words, quizzle.com is about as useful as say ... I don't know ... me telling you faithful readers what your credit scores are.  You right there, your score is 684.  You over there, your score is 575.  You in the red shirt, yours is 702.  Guess what, my credit scoring model is not used by lenders either, so its just as useless as quizzle.com's score. 

Don't take this to mean that I am suggesting buying your score from one of the credit bureaus like Experian, Equifax or Trans Union.  Oh, much to the contrary, that would be even worse.  Then you would be paying for a score that's also not used by lenders.  That's right, folks, lenders don't use the big three's credit scores either. 

Lenders typically do one of two things - they either set their own criteria for what's important to them, which means that particular lender's scoring model is unique.  Or lenders use one of the pre-made scoring models, such as Fair Isaac's scoring model.  So if you really want to get your credit score that could actually be a credit score that a lender might use, then you should buy your score from Fair Isaac by going to http://www.myfico.com/.  The basic credit report (from Equifax or Trans Union) and FICO's scoring model costs $15.95.  The myfico website touts this score as one "lenders use".