Whenever you apply for credit, you can be sure the potential lender will check your credit score. They do this to judge what sort of risk you pose. It’s called “risk-based pricing” and it’s a common practice, especially with credit cards.
If the risk seems too high, you’ll be rejected. If your credit score is excellent, you can expect to be offered the best terms (such as interest rate and credit limit) available.
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So what if your score is less than perfect, but the lender still wants your business? You’ll be approved with a higher interest rate and a smaller credit limit.
“Until now, people would apply for an advertised low rate but get a higher rate, says Gail Hillebrand, staff attorney at Consumers Union. “But they would never be told exactly why they were being offered that higher rate.”
That changed on Jan. 1, when a long-awaited rule took effect. It’s based on the same law that gives you the right to receive a free copy of your credit report from the big three credit bureaus every 12 months. (To get your free report use this site: annualcreditreport.com.)
Under the new rule, lenders who use risk-based pricing must send one of two disclosure notices to customers who are offered credit with less than the most favorable terms. One of the options is the Risk-Based Pricing notice, which advises applicants that their credit history was used to set the terms of the offer. It also explains where to get a free credit report within 60 days.
The other option is to send the Credit Score Disclosure notice. With this option, the lender discloses the actual credit score used to make the lending decision, the date that score was pulled and the credit reporting agency whose information was used to generate it. The notice also explains how your score compares to others.
The Credit Score Disclosure is clearly more useful because it gives you a hard number that you don’t have to interpret and you don’t get with a credit history.
But will lenders choose that option?
I contacted nine major lenders and asked what they’re doing with credit card applications. Six responded. Wells Fargo and Capital One say they use the Credit Score Disclosure for credit card customers. But Bank of America, Discover, American Express, and SunTrust Bank have opted for the Risk-Based Pricing notice – the one that does not include the free credit score.
What do you do with that score?
Your first step is to get your free credit report from the credit bureau listed on the notice you receive from the lender. This does not count as the free report you are entitled to each year. Look for any errors and challenge them.
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If there are no errors in your credit file and your score is not doing too well, you’re going to have to find ways to change your credit behavior that will bring up that score, such as lowering your credit card balances and always paying on time.
“Unless you take the next steps to improve your credit history, you won’t be any better off than you were before,” notes Linda Sherry, director of national priorities at Consumer Action.
You can learn more about the new rules and the new disclosure notices at a new site, scoreinfo.org, just launched by the company that created the widely used FICO score. The site also explains the basics of credit scores and how to improve them.
More free scores on the way this summer
Starting in July, another new federal rule takes effect. It eliminates the two disclosure options and requires all lenders to give free credit scores to applicants who are either denied or given approval – but at less than the best terms – based on that score.
More significantly, the new rule expands these rights to anysort of adverse decision made using a credit score, not just for loans, credit cards and other financial services.
“So if you get an increase in your insurance premium or a landlord does not rent to you because of your credit score, you must be given a copy of the score that was used to make that decision,” says John Ulzheimer, president of consumer education at SmartCredit.com.
Do you need your credit score?
Maybe you don’t plan to apply for credit anytime soon. Should you bother to keep track of your credit score? It’s probably a good idea, because that score is constantly being viewed by someone.
“Your credit score is much more important than just applying for loans,” notes financial expert Jordan Goodman, who runs the website MoneyAnswers.com. “It affects many more things than most people realize.”
These days, when you try to rent an apartment, get cell phone service, order cable/satellite TV or buy insurance, they look at your credit score. That’s why Goodman believes people who can afford it, should sign up for a credit score monitoring service. They range in price from around $85 to $170 a year.
“A credit score is not something you see once and it’s fine, because it’s constantly changing,” he says. ”Something could happen the next day and you wouldn’t know that your credit score plunged, maybe because of some error.”
John Ulzheimer of SmartCredit.com points out that most credit card companies pull their customers’ credit reports and scores every month. It’s called account maintenance.
“So even if you’re not out there actively shopping for something your score is still under scrutiny,” he says. “The reason why you get credit line decreases and interest rate increases, in many cases, is because your credit score has dropped and you weren’t paying any attention to it.”
You can monitor your FICO score from the company that creates it at MyFico.com. It’s $14.95 a month.
Be skeptical of all offers of “free” credit scores. They’re used as come-ons to get you to sign up for monitoring services. So in most cases, it’s not really free. And is it a FICO score they’re offering, which most lenders use? If the advertisement or website does not specifically call it a FICO score, then assume it’s not.
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