Eventually, consumers will be able to visit one Web site or call one central phone number to get a free copy of their report once a year from the three main credit-reporting agencies. Repairing mistakes and guarding against the growing scourge of identity theft will become a lot easier. In a June study, U.S. PIRG, the national lobbying group for state Public Interest Research Groups, found that one in four credit reports contain errors serious enough to result in credit denial.
GAPS REMAIN. The new centralized system will certainly be an improvement over the current one, where consumers are only allowed to get a free report if they have recently been denied credit, if they believe they're a victim of identity theft, or if they live in Colorado, Georgia, Maryland, Maine, Massachusetts, New Jersey, or Vermont. If they find an error, they have to go through burdensome paperwork with each of the three credit-reporting agencies -- TransUnion, Equifax (EFX
), and Experian -- to fix it.
Another part of the law allows consumers who believe they're victims of identity theft to put a "fraud alert" on their file, letting lenders know to be extra cautious before granting credit in their name. The Federal Trade Commission, charged with implementing the new law, believes it will not only improve credit-reporting accuracy, but reduce the incidence of identity theft as well, according to FTC spokesperson Jen Schwartzman.
For all its benefits, the new law has some glaring inadequacies. Chief among them: You'll still need to pay a fee to find out your credit score, which is the actual number that lenders look at when deciding what rate to charge you or whether to offer you a loan at all. The most prevalent kind of credit score -- which is known as FICO, though there are others -- ranges from 300 to 850. The higher the number, the better one's creditworthiness.
KNOW THY SCORE. For example, on a $150,000, 30-year mortgage, someone with a FICO between 720 and 850 would get a rate of 5.64%. In contrast, someone with a score between 520 and 559 would get a rate of 9.29%, according to Web site myFICO.com, a division of Fair Isaac (FIC
), which sells the software that converts the credit report's raw data into a FICO score used by most lenders.
Under the new law, "When consumers get their credit reports, it's just going to be raw data," says Ryan Sjoblad, Fair Isaac's spokesman. While that's useful for uncovering errors, it doesn't give people the main data point a lender looks at to get a snapshot of the overall credit risk, he says. MyFico charges $38.85 to order all three reports and credit scores online.
Once the new system is up and running in each region, expect a promotional push encouraging consumers to get their credit scores. The FTC is still weighing what would be a "reasonable" fee for the bureaus to charge, noting that the typical payment to learn credit scores now is $4 to $8 per report. Only Equifax and myFICO.com will sell you the actual FICO score. Experian and TransUnion have their own proprietary scores.
"CAN'T-DO" PHILOSOPHY. Another inadequacy of the new law: It rolls out gradually. So people in the Northeast won't be able to use the new service until September of next year. The FTC claims it needs to give the agencies enough time to set up the system, says Schwartzman.
Some argue that the gradual rollout reduces the law's impact and seems unnecessary as credit bureaus have already had a year since the law was passed to implement the centralized system. "The FTC listened to the Chicken Little 'can't-do' philosophy of the credit bureaus," U.S. PIRG complained after the rollout schedule was released last June.
Plus, building plenty of time into the launch hasn't made for a seamless process so far. Details like the phone number, mailing address, and Internet address were still being determined just two weeks before the West Coast debut. It took the FTC until Nov. 2 to ask for comment on determining a "fair and reasonable fee" for credit scores -- a process that will last until Jan. 5.
Grading the creditworthiness of every American is a messy process that involves crunching billions of numbers. This creates potential for major errors that can impact people's ability to buy a car or purchase a home. While the new centralized system for reviewing and fixing credit reports will be an improvement, getting it going and working as the law intends will take time and effort. For now, it's best for consumers who want to make sure their credit report is clean and accurate to remain on guard.
Other stories on this subject:
A Long Goodbye at Equifax
Your New Weapon vs. ID Theft
Who's Policing the Credit Cops?
Credit Cards That Scream "I'm Rich!" Stone is a senior writer at BusinessWeek Online