In 2010 Congress passed the so-called Wall Street Reform and Consumer Protection Act, Dodd-Frank for short, in answer to the bank failures and financial meltdown. Credit score reform, in particular, is supposed to foster changes in how the lender communicates with the consumer and how the credit bureaus and reporting companies use consumer financial data.
These changes are supposed to:
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Facilitate competition and innovation in credit scoring.
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Lead to better offers and services from financial institutions.
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Make it easier for consumers to manage their money.
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Strengthen the overall economy.
Modern financial management can be confusing because there are many different types of financial instruments and variations in practice. Many people feel they don’t understand their finances as well as they should and most say their children do not understand money management at all. Parts of Dodd-Frank are supposed to help with this.
The Consumer Protection Act now requires lenders to freely provide a consumer’s credit score and reports to him in the event of a loan denial or if there is a difference in interest rate between that consumer’s offer and what the lender offers it best customers.
Besides receiving this information from a lender, it is much easier for consumers to obtain copies of their credit scores and reports. The hope is that, armed with this information, consumers will be more careful of the debt they take on and have a better idea of their ability to pay the debt on time.
Dodd-Frank also limits or disallows prepayment penalties for paying off a loan early. Where, before, companies could still make money either through interest or pay-off penalties, that practice penalized the borrower. This levels the playing field and gives consumers more flexibility in paying down debt.
The Bureau of Consumer Financial Protection was created to regulate mortgages, credit cards, payday lenders, check cashing companies, and lenders that provide private student loans. Over time, financial institutions may find that being transparent and customer friendly is a more profitable way to go.
And there you have it – the facts, fictions and fundamentals when it comes to your credit score. Odds are you already knew the importance of a good credit score, but with the information from this series, you’re on track for a strong and accurate credit score.
* Image courtesy of FreeDigitalPhotos.net
