Tighter lending by banks and tough economic conditions have raised awareness among consumers about the importance of credit reports and credit scores in determining the interest rates lenders set for them. Since the Fair & Accurate Credit Transactions Act (FACTA) was signed into law in 2003, consumers have been entitled to receive on request free credit reports annually from the three leading credit bureaus—Equifax (EFX), TransUnion, and Experian. That legislation amended the Fair Credit Reporting Act (FCRA) of 1970 and gave birth to a centralized Web site called AnnualCreditReport.com, where consumers can get their free reports. (The government couldn't call its site FreeCreditReport.com because the name was already in use by Experian.)
Unfortunately, ordering your free credit report is no longer so simple. There's been a proliferation of Internet sites that automatically sign up applicants for fee-based credit monitoring services with a 7-day trial period when they request a free credit report. One sign of how overheated the market is: industry consolidation. In March, privately held Calabasas (Calif.)-based CreditReport.com announced its acquisition of competitor CreditScore.com but wouldn't give details about how many subscribers the combined company will have.
Growing interest in credit scores and credit monitoring could be viewed as proof of greater financial literacy among consumers following a housing bubble stoked by predatory lending practices and a financial crisis that destroyed trillions of dollars in wealth. But Ed Mierzwinski, consumer program director for U.S. PIRG, the federation of state Public Interest Research Groups, sees it as a sign of financial hypersensitivity, which he says the credit bureaus have helped to foster. Credit monitoring is a "protection racket," he says.
"They've turned everyone into financial hypochondriacs…who are scared of their own financial shadows, so they're paying for all of this protection they don't need," he says. "If you spent $150 a year on credit monitoring, you'd be better off paying off your credit cards."
Indeed, severe constraints on access to credit have spurred consumers to pay debt and save money. The Federal Reserve's most recent G19 Report showed on Apr. 7 that total revolving credit outstanding—mostly credit cards—had fallen to $858 billion at the end of February 2010, from $958 billion at the end of 2008.
credit-score reports still cost money
Government agencies and consumer advocacy groups have been tracking developments in the credit-reporting business, leading to some recent regulatory crackdowns. Besides reining in the behavior of credit-card issuers, the Credit Card Accountability, Responsibility & Disclosure Act of 2009, which took full effect in February, gives the Federal Trade Commission more authority over credit-report offers. On Apr. 1, the FTC issued a new rule intended to prevent deceptive marketing of free credit reports.
In the wake of the rule change, Experian has begun to charge $1 for credit reports offered on the Web site FreeCreditReport.com, but hasn't changed its FreeCreditScore.com site. The FTC ruling doesn't apply to free credit-score offers, since the Card Act provision seeks to remove any confusion about consumers' federal right to a free credit report, not a free credit-score report, says Steven Toporoff, an attorney with the FTC's Division of Privacy & Identity Protection. A spokeswoman for Experian said in an e-mail that "both FreeCreditReport.com and FreeCreditScore.com are fully compliant with current regulations."
In 2007, Experian's consumer service division, Consumerinfo.com, had to pay $300,000 to settle FTC charges that its "free credit report" ads didn't disclose adequately that consumers who signed up would be automatically enrolled in a credit-monitoring program and charged $79.95. The FTC alleged that the failure to clearly disclose the enrollment and charges violated an August 2005 settlement that cost Consumerinfo.com $950,000 to settle FTC charges that it had deceptively marketed "free credit reports."
For its part, CreditReport.com extols the value of its $14.95 credit-monitoring service by saying that credit reports themselves are mere snapshots that lose their value in days. A company study of 1,256 subscribers who signed up for free trial service on Nov. 1, 2009 and stayed active through Jan. 31, 2010, showed that consumers received an average of four alerts about significant changes to their credit score and five about significant changes in a specific account reported by a creditor during the first 90 days of membership. The use of credit scores to set insurance premiums, interest rates on home, car, and student loans, and in employers' hiring processes makes it important to continually monitor information on your credit report, says the company, which links to data on the reports of all three credit bureaus.
cheaper to buy reports twice a year?
Another key reason to get credit monitoring: Alerts sent out to subscribers within 48 hours of new information appearing in any of their three credit profiles are the most efficient way to discover they're being victimized by identity theft, says Bruce Cornelius, chief marketing officer at CreditReport.com. "How much time would you like to give that identify thief to get away—three months or [a few] days?" he asks.
Mierzwinski says nobody needs ongoing credit monitoring. He advises anyone applying for a mortgage to audit their three credit reports several months before closing on a home to make sure they know what's on them and to clear up inaccuracies that could affect their mortgage rate. For those who want to look at their credit reports more often, it's cheaper to buy once or twice a year than to pay monthly credit-monitoring fees because the reports cost only $8 to $15, he says. Mierzwinski disapproves of the 7-day trial period companies typically offer because most commercial offers give consumers 30 days to cancel purchases.
Mierzwinski isn't alone in criticizing the practices of credit-monitoring services. Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, a network of 100 agencies with 850 offices across the country, doesn't favor the blue-print-on-blue-background scheme that CreditReport.com uses to post its disclosure about the 7-day free trial for its monitoring service, which she says makes the disclosure easy for consumers to miss. Nor does she like how similar its URL is to www.AnnualCreditReport.com, the government's official site. While she thinks the absence of a long-term contract for monitoring services at most sites is a plus, she urges customers to check what hoops they'll have to jump through in order to cancel service.
Cunningham advises clients to stagger requests for free credit reports from the three bureaus so they can see an up-to-date credit profile every four months. She agrees that people who plan to apply for a mortgage or another big-ticket purchase should get all three credit reports at once: "I want consumers to go into purchasing such products with their eyes wide open, to do their research and understand the level of risk." People who have already been victims of identity theft may feel compelled to sign up for regular credit monitoring, "but if you're just trying to be a savvy consumer, you could probably find something to meet that need for less money per month," says Cunningham.
credit monitoring of compromised data
Most of the leading credit-card issuers in the U.S. offer some form of credit monitoring as part of their product, though some don't link to information from all three credit bureaus. Their fees are in some cases lower than CreditReport.com's monthly $14.95 charge.
While the FTC wants to be informed about any company that misrepresents what it can do by monitoring consumers' credit profiles, it won't go as far as to say there's no value in credit monitoring. "When there's a breach of data, one thing we have said companies should consider is whether they want to make monitoring available to those [consumers] whose data has been compromised," says Toporoff, the FTC attorney.
Credit-monitoring providers may soon lose a key target audience for their services: job-seekers. In July 2009, representatives Steve Cohen (D-Tenn.) and Luis Gutierrez (D-Ill.) introduced a bill that would prohibit the use of credit checks in the hiring process. The states of Washington, Hawaii, and Oregon already prohibit prospective employers from using credit checks when making hiring decisions, except when the credit information is deemed "substantially job-related." Fifteen additional states are considering bills to ban credit checks on most job applicants, according to a Mar. 1 story by the Associated Press that attributed the information to the National Conference of State Legislatures.
Stronger consumer protection under the law may turn out to be one of the enduring legacies of the credit crisis. The debate over the value of credit-monitoring services—and the way they are marketed—is likely to continue, too.