When lenders make a decision about your credit card or loan application, the decision isn’t always as simple as “Approved” or “Denied.” Sometimes, lenders approve applications, but with less favorable terms than were advertised. For example, you may receive a pre-approved credit card offer for 0% introductory interest rate, but end up getting approved with a 10.9% interest rate.
Before this year, you wouldn’t have known why you received less favorable terms – the credit card issuer may or may not have told you if you asked. Recent changes to the credit reporting law require lenders to give more notifications to consumers who don’t get the best terms or whose current terms are changed because of credit report information.
Two New Required Notices
As of January 1, 2011, lenders are required to provide a notice to applicants whenever the applicant’s credit history affects the terms they’re given. This new risk-based pricing rule gives lenders two options for notifying applicants when they receive less than favorable terms.
The Risk-Based Pricing Notice explains to consumers that they’ve been approved, but for less favorable terms. The notice describes what a credit report is, how your credit report was used, how you can get a free copy of your credit report, and how to dispute inaccurate credit report information. The Risk-Based Pricing Notice does not include your credit score.
The Credit Score Disclosure Notice includes your credit score, date of your credit score, and source of your credit score. In addition, the notice tells the range of your credit score, how your credit score compares to the rest of the population, and information on how you can access your credit report.
More Consumers Will Get a Free FICO Score
Since most lenders use FICO score, the new law presents a chance for consumers to get a free FICO score. The only other way to get a free FICO is to sign up for a trial subscription to FICO’s Score Watch product. The trial must be cancelled within 7 days to avoid having your credit card charged.
Craig Watts, Director of Public Affairs at FICO, estimates 1 billion notices will be sent out this year and at least half of those will be Credit Score Disclosure Notices which will likely include FICO scores. To help lenders with the notification process, FICO has prepared a template that also gives lenders the option of telling consumers which FICO version has been used. And to help consumers understand more about the new notifications, FICO has launched a new website – ScoreInfo.org. There’s nothing for sale at ScoreInfo, just information to help us better understand the new notifications.
More Changes to Come
On July 21, 2011, the system of credit notices will change again as a result of the Dodd-Frank Act. All applicants who apply for credit and are either denied or approved but with less favorable terms will receive a copy of the credit score used in that decision. At that time, Risk-Based Pricing notices must include information about your credit score. Similar to the Credit Score Disclosure Notice, the new Risk-Based Pricing notices will include your credit score, credit score range, and major factors affecting your score. It won't necessarily compare your credit score to the rest of the population.
Adverse Action Notices Still Apply
These required notifications are only sent in response to a credit card or loan application when the decision involves your credit report or credit score. They aren’t sent when adverse decisions are made on non-credit based factors, like income. You won’t receive these new notifications for decisions on other credit-based applications like insurance rates, rental applications, or cell phone contracts. All businesses are still required to send an adverse action notification when your application is denied because of information on your credit report.
Account Review Notice
A third notice is included in the new rule, the Account Review Notice. Lenders have to send an Account Review Notice whenever they change your account terms based on information in your credit report. Like an adverse action notice, the Account Review Notice gives you the right to a free credit report as long as you order within 60 days.