New Risk-Based Pricing Rules Empower Consumers

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NEW YORK (MainStreet) – Risk-based pricing rules, an amendment to the Fair Credit Reporting Act that ensures more transparency in lending decisions, went into effect on Jan. 1.

The rules require any lender who turns down a credit application or provides a less favorable line of credit due to the applicant’s credit report must explain why he or she received less than favorable terms. This doesn’t mean, however, that credit-crunched applicants will now have access to an unlimited supply of free credit reports.  

“The new rules are a step in the right direction but don’t guarantee that consumers will get a free copy of their score,” John Ulzheimer, president of Consumer Education for SmartCredit.com, says.

That’s because by law, lenders still have a choice over the type of notice they send. Applicants will either receive a letter stating that a higher interest rate is due to a credit report, or a  review or document providing them with a copy of the credit score that led to the decision.

Ulzheimer explains that if the lender chooses the score disclosure option then consumers will receive their actual score, rather than an artificial “educational” report that credit bureaus often sell to consumers and that doesn’t include the official number.

In addition to this benefit, joint applications require that a notice be provided to each person who applied for the credit line.

One drawback to the new regulations is that they only apply to lenders, not insurance companies, landlords or utility providers. So for now, those turned down for an apartment, for example, won’t be able to find out whether it was their credit score that caused the problem.

That will be rectified come July when the FACS Act (Fair Access to Credit Scores Act), sponsored by Sen. Mark Udall (D-Co.) and part of the Wall Street financial reform package, goes into effect. The FACS Act mandates that anyone making a negative decision based on an applicant’s credit score must disclose the information so consumers can take action to improve it.

“Credit scores are critical for American consumers, especially in a struggling economy,” Udall explained at the time of the bill’s proposal in May.“Higher credit scores often mean lower interest payments for credit cards, automobiles and home mortgages. Consumers who have taken advantage of their one free credit report per year are often surprised to find out it does not include their actual credit score.”

For more details of the legislation check out MainStreet’s look at what the FACS Act covers.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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