New Credit Score Rules

This week, consumers will finally be entitled to an explanation from lenders who offer them sky-high interest rates or deny them credit altogether. But critics say borrowers are still being left in the dark.

Part of the financial reform bill, the new rule kicks in on Thursday and says that any borrower who is denied credit or offered a higher-than-usual interest rate is entitled to see his credit score without even having to ask. The rule is supposed to wipe out much of the secrecy surrounding the lending process and give consumers the information they need to get a better deal in the future. And for the most part, this is the first time ever that consumers will have such access, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site. Right now, consumers can't see their credit score for free except when they apply for a mortgage.

But critics say the rule has enough loopholes that the required information may leave consumers more confused than they are now. "We're concerned," says Chi Chi Wu, a staff attorney focused on consumer credit issues at the National Consumer Law Center. "What we would have liked to see is clear rules."

At its most basic, the information consumers receive could be confusing. Lenders are required to send applicants their scores if they are offered a rate that's higher than what the lender offers many of its customers, Ulzheimer says, but there's no way for consumers to know what the typical rate is. If a lender offers a high rate to everyone, an applicant isn't entitled to see his score.

And then there are several situations in which the rule gets bent. If a bank uses only its own scoring system with its own data to evaluate a borrower, it doesn't have to send that score to the consumer. If a bank uses its own scoring system in conjunction with a traditional credit score, the bank only needs to disclose the latter. The problem, experts say, is that if a bank is using a proprietary scoring system, a traditional credit score may not give consumers enough information about why they weren't given the best possible offer.

There are other industries that use credit scores to evaluate applicants but will mostly fall outside of the new rules. Car and home insurance companies routinely use an "insurance score," which takes into account an applicant's credit score and his insurance history those scores are exempt from the new rule. Utility companies also use their own scoring system, part of which includes a standard credit score, and they are likely to be exempt. But landlords may not be, if they use a consumer's credit score as a reason to deny them an apartment or to request a larger security deposit, says Ulzheimer.

For their part, the banks say that sharing their proprietary scores would be more confusing than helpful. Because banks' scoring systems are different, comparing among institutions is nearly impossible, says Nessa Feddis, senior counsel at the American Bankers Association. And the insurance industry says the credit score is only a small fraction of their evaluation process and that insurance scores are far more complicated than an applicant's credit history.

Despite the complications, consumer advocates do say having at least some idea of your credit score is better than none. "This is a learning opportunity," says Linda Sherry, director of national priorities at Consumer Action. "It will give people a practical example of how credit matters when they need to borrow money."