The New 'Free' Credit Reports: A Good Deal?

But, as with any product marketed as “free,” consumers should watch out. “Numerous web sites offer ‘free’ reports or credit scores that are tied to offers of credit monitoring or other services,” says Ryan Wiggins, a spokeswoman for Florida’s attorney general’s Office. FreeCreditReport.com, FreeScore.com and even FICO itself offer free reports and scores as part of a trial period for their credit-monitoring services that, unless canceled within a certain deadline (sometimes as short as seven days), can cost you as much as $29.95 a month. These terms are usually spelled out on the product’s sign-up page, so be sure to read all the fine print before you give out your credit-card number.

Thanks to the Fair and Accurate Credit Transactions Act (FACT Act) of 2003, consumers are now able to get one free credit report per year from each of the three major credit bureaus -- Experian, Equifax (EFX) and TransUnion — through annualcreditreport.com. (Credit scores are not included in the government-mandated free reports.)

Despite the shortcomings – the free scores they offer are different from the FICO score – these services can be a viable solution for cost-conscious consumers who want to stay on top of their credit. “It gets a little pricey and when you see month after month no change [to your credit], you start to question the value of these services,” says Dennis Moroney, a senior analyst for financial-services research firm TowerGroup.

That’s not good news for the credit bureaus, who are already feeling the pinch of the credit crunch. Although they make some money from the free services, some of which confirmed that they pay for those scores or reports on the consumer’s behalf, the bureaus are selling fewer of their own consumer credit reports and scores to lenders – and fewer to consumers, as well.

“The demand for credit has decreased in the past year, so the need for credit checks has decreased,” says Bradley Meeks, an equity analyst who covers Equifax and FICO (FICO) at research firm Morningstar. “Those are discretionary purchases for most people, and they’re not going to spend $30 in this environment.”

While exact numbers on direct-to-consumer sales are hard to get (the credit bureaus pair that category with other parts of the business, say, lead generation or mortgage solutions), operating revenue at Equifax’s U.S. Consumer Information Solutions segment was down 9% in the first half of the year compared with the same period in 2008.

At Experian, direct-to-consumer sales are still growing (thanks largely to its widely advertised FreeCreditReport.com), though nowhere near the 20% to 30% rates registered between 2005 and 2007, according to Carter Malloy, an analyst who covers the company at Stephens Inc., a privately held, full-service investment banking firm in Little Rock, Ark. Malloy predicts mid- to high-single-digit growth over the next five years. “General consumer interest [in credit and credit scores] is continuing to rise,” he says.

TransUnion, a privately held corporation, does not release earnings numbers.

If you’re planning to apply for credit in the near future, these free solutions may not be enough. The free score offered by CreditKarma.com is a TransUnion score that, although commercially available to lenders, is not nearly as widely used as the FICO score. (And the point-difference between the two can be high. The TransUnion score ranges between 150 and 950 points, while the FICO range is 300-850.) Quizzle.com’s free score is not used by lenders at all. Neither is the credit score you get from FreeCreditReport.com, which is Experian’s PLUS score.

One of the few – and not entirely risk-free – ways to get a truly free FICO score is to sign up for the company’s Score Watch credit-monitoring service and cancel your membership within 30 days. Another possibility: Some financial institutions are starting to offer free FICO scores as a value-added service to their clients. According to FICO, one of the three biggest banks will roll out free FICO scores in the near future. (Bank of America (BAC), Citigroup (C) and JPMorgan Chase (JPM) did not return our requests for comment.)