The new rule mandates that consumers must receive the actual score used in evaluating their credit if they were denied credit or granted credit at less than favorable terms compared to other consumers. If more than one credit score was used, any one of the scores can be provided. The score must also be accompanied by contextual information such as the factors that influenced how the score was determined.

In order to comply with the new regulations, many banks may end up defaulting to disclosing consumer’s scores in a wide range of circumstances for simplicity’s sake. American Express plans to comply by disclosing scores when a credit or charge card application is denied, an account limit is reduced or the account is canceled. Capital One has also stated that it will disclose a consumer’s credit score when a score was used to determine an interest rate or decline an application.

The rule will be enforced by the new Consumer Financial Protection Bureau, which also officially launches today.

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It Just Became Easier to Get Your Credit Score for Free

To give LifeLock a try using this promo, go to www.lifelock.com/enroll and enter Promo Code: NEWMEMBERCJ, Member ID: 477979. You will need to enter in all your personal information (including SSN), but it doesn’t appear that billing information is required. This offer is good until April 16, 2010 or all 5 memberships have been taken.

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Free LifeLock Subscription for 1 Year

This offer is available online at americanexpress.com/creditreport (Via FW)

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Free Experian Credit Report and Score for Amex Cardmembers

• 300-850 score range
• Reason codes
• Minimum scoring requirements
• Inquiry de-duplication treatment
• Consistent score-to-risk alignment

Under the hood, the new algorithm will seek to do a better job at predicting the likelihood of default by addressing a couple of key areas:

Protecting from “piggybacking” abuse
As previously detailed, credit scoring “piggybacking” allowed people with bad credit to leverage the payment histories of those with good credit by becoming authorized users on their accounts. Unfortunately, many credit repair companies began abusing this loophole, causing scores to lose their predictive value. FICO 08 aims to stem this abuse, while still allowing legitimate authorized users, such as spouses, to benefit.

Better predictor for consumers with subprime credit
Fair Isaac claims that FICO 08 can improve the predictive performance of subprime borrowers by 5-15%. Fair Isaac attributes the increased accuracy to increasing the number of customer segments from 10 to 16, evaluating the “degree of ‘bad’ behavior…over the 24 months following scoring relative to ‘good’ behavior”, and eliminating the effects of minor delinquencies, such as parking tickets or library fines.

Customer testing for FICO 08 is scheduled to be available at TransUnion by the end of January 2009, and at Equifax by the second quarter of 2009.

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FICO 08 Promises to Better Predict Defaults

An oft overlooked consequence of these actions by banks is that a consumer with a perfect payment history and who has managed their credit responsibly could still find their credit score plunge.

How your FICO score is affected
Consider this: According to Fair Isaac, creator of the FICO score, 30% of your score is attributed to the debts you owe, including the ratio of your balances to your total credit limits. If a bank shrinks your credit limit, your credit utilization ratio will increase, and consequently have an adverse effect on your credit score. Another 15% of your score considers the length of your credit history. When an issuer closes an inactive account, it also adversely affects your score, since having old, established credit lines helps your credit score.

Where the credit spiral comes into play
In theory, another issuer could notice that your score has dropped and decide to take adverse action against you as a result, causing your score to drop even further.

Steps to take
Are the credit reporting agencies accounting for these contingencies in their models? Is there anything you can do to avoid this happening to you? Unfortunately it seems mostly out of our hands, but here are a few ideas that could help:

• Do not let any credit cards idle for too long. Issuers are now aggressively closing accounts that have been inactive for more than 12 months without warning.
• Do not apply for a lot of new credit at once. The days of the traditional App-O-Rama are long gone. Applying for too much credit will set off alarms and provoke a chain of adverse action.
• Charge less or pay down your balances. If your limits have been cut, one obvious way to improve your debt to credit ratio is to decrease your debt.
• If a dormant account that has been closed is important to you, you can try to have the issuer re-open it. Call customer service, plead your case and escalate to a supervisor if necessary. If instead your credit limit has been cut, you can also ask for it to be reinstated, but that request is much less likely to be granted.

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Avoiding a Credit Score Death Spiral

• Existing subscribers can click here.
• New subscribers can find the $9.95 offer at this link.

Via FW.

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TrueCredit Credit Monitoring for $9.95/Month

1. Sign up for six months of credit monitoring services. If you select this option, you can also register to possibly receive cash benefits in the event of a cash distribution or file an individual lawsuit against the Defendants.
2. Sign up for nine months of enhanced credit monitoring services. If you select this option, you will not receive any further benefits, including a cash payment, and you will not be able to file an individual lawsuit against the Defendants.
3. Register to possibly receive a cash payment. If you select this option, you can also sign up for six months of credit monitoring; however if you receive a cash payment, you cannot file an individual lawsuit against the Defendants.

Note that if you select the cash payment option, you will only receive payment after two years, and only if there is any money left over from the $75 million settlement fund set aside for this purpose that has not been used up by other “post-settlement claims” or various administrative costs, including notifying class action members, claims administration and legal fees.

Register by September 24, 2008 at this link. (Thanks to reader Eric.)

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TransUnion Settlement: Free Credit Monitoring for Nearly All

MyFICO.com (Via SD)

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MyFICO.com 30% Off Promo Codes

• Eliminating the benefits of “piggybacking,” as outlined in a prior post, where scores are artificially boosted by adding authorized users onto an established credit line
• Rewarding those with more varied types of credit, such as having both revolving (e.g., credit cards) and installment accounts (e.g., mortgages, auto loans)
• Penalizing those who use a high percentage of their available credit
• Increasing the importance of keeping accounts active
• Allowing more leeway for borrowers more than 90 days late on a payment if most of their other accounts are in good standing; conversely, penalizing borrowers who have multiple such delinquent accounts more harshly

The score itself will still have the same scale, with scores ranging from 300 to 850, and be based upon the familiar parameters of payment histories, credit history length, number and type of credit inquiries, as well as the mix of credit accounts in use. Because of disputes between Fair Isaac and the three credit bureaus, however, it is unclear as to the exact timeline of Fico08′s release. For more details, see the WSJ or MSNMoney articles.

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FICO 08: The Next Generation in Credit Scoring

Note that if you are only interested in looking at your report (and don’t need the score), you’re entitled to one free credit report every 12 months from each of the three credit reporting bureaus. You can request your free reports through annualcreditreport.com.

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MyFICO 25% Off Promo Code

A credit freeze blocks access to a consumer’s credit report and score, making it significantly more difficult to obtain new credit. Currently, consumers in 15 states don’t have this ability. (For credit freeze rights in your state, see this page.) Freezing your credit won’t help, however, if an identity thief already has access to your credit accounts.

If you are a victim of identity theft, the credit bureaus will allow you to freeze your file for free. Otherwise, they will charge either $10 to add, lift or remove a credit freeze, unless a lower fee is mandated by state law. This means it will probably cost you $30 to place freezes across all three bureaus.

TransUnion’s service is planned to go into effect on October 15, while Experian’s will go live November 1. No date has been set for Equifax as yet.

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Credit Agencies to Offer File Freeze Universally

To be fair, there is certainly merit to this position. I would even go so far as to say that it’s a useful rule of thumb. But to paint it as a black and white issue, as an absolute not to be questioned, is where I take issue. There are circumstances where I would argue that accounts should be closed. There are also times when closing an account could actually help your score.

When should an account be closed?

To me, an obvious instance when an account should be closed is if it has an annual fee and the account is one that you could live without. Why pay the fee for a card you will never use? If the only reason you would keep the account open is for your credit score, that is not a compelling enough reason. You should keep your credit score high enough so that you can profit from it, and not maintain it for its own sake. Besides, as long as you have other lines of credit that you maintain responsibly, you’ll eventually recover from any short-term hit to your credit score that closing the account would cause.

How could your credit score be hurt by leaving an account open?

According to this booklet from myFICO (page 12), one of the factors that weighs into your credit score is the average age of your accounts. Consider the very simple example where you had 10 accounts, 5 of which were open for 10 years and 5 of which were open for 5 years. If you closed a few of your accounts that were open for 5 years, that would obviously push up the average age of your accounts and presumably help your score.

Another nebulous factor in your credit score is the “mix” of credit that you’re using (page 14 of the booklet). That is, your score considers what types of credit accounts you have and how many of each. Your score also looks at the total number of accounts you have. How adding or subtracting accounts will affect your score in this respect is very murky.

I have to wonder what correlation exists between closing a credit card account and your likelihood of repaying a debt. If there is no such correlation, then one would think that the credit scoring model should not be penalizing anyone merely for closing an account.

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Credit Scoring Myth: Closing Accounts Will Hurt Your Score

1. Go to www.truecredit.com/code
2. enter code CNAA DHSC WHXB YWDB
3. Log in if you have an existing TrueCredit account or create a new one

The code expires May 4, 2007 and entitles you to:

• Unlimited TransUnion Report and Score*
• 1 year of TransUnion Credit Monitoring
• 1 year of Identity Theft Insurance*

See www.truecredit.com for more details.

Edit:   It looks like this deal has been expired prematurely and is no longer available.

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Free TransUnion Credit Monitoring, Credit Scores and ID Theft Insurance For 1 Year

Some Web-site promoters say they can add 80 to 120 authorized users onto a high-quality credit-card account before banks or lenders get suspicious. Each account can rent for as much as $1,500 to $2,000 for a 180-day usage. The primary credit-card holder receives a cut of the rental fee, often hundreds of dollars for each authorized user added to the account.

The person seeking a higher credit score does not obtain actual access to the credit card. But within 30 to 90 days of being added to the account, the national credit bureaus incorporate the primary cardholder’s ongoing account information into the files of the authorized user. The score-raising attributes of the primary cardholder’s stellar payment record then flow through to the new user.

Why does this work? When someone adds you as an authorized user on their credit card account, the credit card company has the option of including the account’s information in your credit report. Some companies will exercise this option; others may not. Should the credit card company include the account in your report, for credit scoring purposes, it’s as if you were the owner of that account since its inception. As a consequence, when you are added as an authorized user of a very old account with a high credit limit and an excellent payment history, that rubs off on you in a very positive way. It helps for at least a couple of reasons: 1) the older the accounts you have open, the better, and 2) it should decrease your overall credit utilization.

Normally, you wouldn’t add someone as an authorized user unless they’re a relative or someone you really trusted. But there are apparently no restrictions on either the relationship or the number of authorized users that can be added to an account. This lends itself to abuse as described above.

To be honest, I don’t know the reason why authorized users are treated like this in the credit scoring’s system in the first place, but you would think that there would be easy remedies. For instance, why treat authorized users the same as a primary account holder? And shouldn’t it be easy enough to flag the cases where there are an excessive number of authorized users on a single line of credit?

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Exploiting a Credit Scoring Loophole for Profit