Your credit score is essential financial information, but if you’re like many consumers, you don’t know much about it. Luckily, new laws mean that you can learn about your credit score more easily than ever – and for free!
What is a Credit Score?
A credit score is a numerical value assigned to you based on your credit file. This file includes information like how much debt you have, whether or not you make payments on time, and how long you’ve had credit-based accounts.
One popular model for calculating a credit score is the FICO formula. Your FICO score can range from 300 to 850. Generally, the higher it is, the lower the interest rate you will pay on a mortgage, car loan, personal loan, or credit card. A high FICO score has other benefits, too, like showing a potential employer that you’re a responsible person.
Scores around 800 are considered outstanding. Scores below 600 generally put you in the category of sub-prime lending.
Getting a Copy of Your Credit Score – for Free
Getting a copy of your credit report, which usually just includes your credit file information – not your actual, numerical credit score – is relatively easy. Under the Fair Credit Reporting Act, you’re entitled to one free copy of your credit report per year from each credit reporting bureau (Equifax, Experian, and TransUnion). But you’d still have to pay a fee to see your numerical credit score.
Before 2011, getting your hands on your credit score for free was tough. Because of this, most people only checked their score if they were denied a loan or new line of credit. The denial would let you get a copy of your credit report, not normally including your credit score.
That all changed in 2011. Thanks to a federal regulation that took effect on January 1, 2011, any credit issuer who denies you the best rate given to any consumer will have to explain why, which includes disclosing your credit score to you. The new regulation is actually a rather belated effect of the Fair and Accurate Credit Transactions Act of 2003.
How This Helps You
For example, let’s say that the best mortgage interest rate your bank issues to any borrower is 5%. They approve you for a loan, with an interest rate higher, even minimally higher, than 5% – 5.5%, 5.25%, or even 5.1%.
Now, they have to tell you precisely why you didn’t get a loan on the absolute best terms the lender ever makes credit available. This means that you’ll have much more information at hand in order to set your credit report straight. If there is faulty information on your report, you may be able to raise your score dramatically by correcting that faulty information, resulting in a more favorable loan.
Under this law, lenders have two options: They can either provide a borrower with a “risk-based pricing” notice and a credit report, or with a free credit score.
Risk-based pricing is a fancy way of saying that a lender looks at your credit history and assigns rates based on payment history, any periods of delinquency, etc. Somewhat fortunately for you, it’s a minor administrative nightmare for a lender to send you a risk-based pricing report. So, most of them will simply send you your credit score instead. For most consumers, this will mean free access to your credit score.
Up until about ten years ago, credit scores were mysterious. Most consumers never knew their scores. Those who did paid handsomely to learn them. Even today, most people who check their scores learn about them through a paid service, generally for a fee of between $8 and $15.
Of course, this new practice won’t give you a free way to get your score before a loan application. You’ll only receive your score or risk-based report from a lender if you are denied their best rate. If you are denied a loan outright, you won’t receive a score, although in that case you are still able to receive a free copy of your credit report.
In the long run, this law should mean much more transparency from lenders. Consumers will get a much clearer idea of what criteria are being used to judge their fitness for a loan.
Also, it will prompt more consumers to consider the best long term credit strategy: pay your bills on time, keep your credit balances low, and check your credit report for the accuracy of information therein.
If you find yourself given a higher than perfect rate for a credit card, take it as an opportunity to check your score and your report. Then, improve both, preferably far before you make an even bigger financial leap, such as a home mortgage or car loan. A fraction of a percent can mean thousands of dollars over the life of a mortgage, so do your best to keep a good credit score and your rates low!