The Federal Reserve has ruled that credit card applicants can now see their credit scores free of charge when a bank bases a decision to decline service based on the credit score.
The Federal Trade Commission and the Federal Reserve Board a joint announcement introducing new rules regarding the introduction of free credit score notifications under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The act already allowed consumers to request free copies of their credit report if they were declined when applying for new credit.
However, these free reports did not include a credit score or an explanation of which method was used to determine an applicant’s credit score. Under the new regulations, consumers will be able to see their credit score if a bank uses that score to decline credit applications.
The new regulations will also cover situations in which the consumer applies for a credit card or personal loan as part of a promotional offer, but is only able to obtain approval for a much less attractive account, usually featuring a much higher APR or a very limited line of credit. In these particular cases, lenders must explain why the applicant is considered a credit risk for the promotional offer.
The consumer can request the same free credit report and credit score information as they would had the account been denied completely. Consumers have the right to decline an offer of a less attractive account without a negative impact on their credit report or credit score. This is thanks to the terms of the Credit CARD Act 2009.
The new rules are part of upcoming changes to the Federal Reserve’s ‘Fair Credit Reporting Regulation‘ which is also known as Regulation V. The rule changes will take effect 30 days after their printing in the Federal Register which is expected to take place very soon according to a statement made to reporters by a Federal Reserve spokesperson.
The adjustment to the regulations directly address a common concern among many credit card applicants. Many banks are still using the popular FICO score to assess a potential borrower’s credit risk. However, credit reporting agencies and banks also have their own risk management departments who have implemented their own algorithms to convert data into a more streamlined credit score. Even FICO employs multiple formulas for different types of lending. The new regulations will help consumers to better understand which scoring model their lender has used while also highlighting factors which have impacted their decisions.