What were you doing when the clock struck midnight on December 31st and ushered in 2011? Regardless of what you were doing I’m pretty sure I can guess what you were not doing. My guess is you weren’t counting down the minutes waiting for the new Risk Based Pricing rules to become effective, which is exactly what happened at precisely the same time the ball dropped in Times Square.
A much anticipated change to the Fair Credit Reporting Act (FCRA) back in 2003 went live on January 1, 2011 and promises to give consumers a peak inside the practice of what’s referred to as risk based pricing. Risk based pricing is the practice whereby a lender assigns the terms and conditions on credit related products commensurate with the applicant’s level of credit risk.
The better your credit, the better your deal. If you have great credit, you’ll get terms that not everyone will get. If you have poor credit, you might get approved but not at the best terms. This is the standard operating procedure in almost all credit environments including mortgage, credit card and auto lending. The lenders “base” their “pricing” on your “risk”, hence the term…risk based pricing.
The new Risk Based Pricing rules now require that a lender who approves an application, but not at their best rate, give the applicant one of two disclosures. The disclosure options are as follows…
The Risk Based Pricing Notice – This option will inform the new customer that they did not get the best deal (interest rate or credit limit for example) from the lender and that their decision was made, in part, based on data from a credit report. The customer now has two months to claim a free credit report from the credit-reporting agency that provided the lender with the credit information.
The Credit Score Disclosure Notice – This option will provide the new customer with a variety of things having to do with the score used by the lender to make their decision. First, the actual score used by the lender will be shared with the new customer. This marks the first time consumers will be given their actual scores from lenders, outside of the mortgage environment which has had a Credit Score Disclosure requirement since 2003.
In most cases the score disclosed will be your FICO® credit score, which is designed and developed by FICO (formerly Fair Isaac Corporation). In addition to your actual FICO score you’ll also be provided with the numeric range of the score, which is published as 300 to 850. You’ll also be told where you rank, score-wise, compared to the overall U.S population. And, as with the Risk Based Pricing Notice, you’ll be told how to claim your free credit report.
NOTE: In both of the above notice options the letters will direct you where to get your credit report. In the Risk Based Pricing notice the report will come directly from the credit bureau that provided the data to the lender and it will NOT count against your annual free credit report allocation. In the Credit Score Disclosure notice the report will come from www.annualcreditreport.com and it WILL count against your annual free credit report allocation.
What the New Rules do Not Mandate – The Risk Based Pricing rules only apply to adverse approvals (approvals where you didn’t get the best deal) and they only apply to financial services companies. They do not apply if you’ve been flat out denied credit and they do not apply to insurance companies, utility companies and property management companies…all whom use credit reports and scores to make decisions about your terms.
Additionally, the choice of disclosures will be made by the lender and they won’t all choose the credit score option. In fact, according to this recent MSNBC article, Bank of America, Discover, American Express and SunTrust have chosen the non-score option. Wells Fargo and Capital One have said they will use the score option for credit card customers.
It Gets Even Better on July 22, 2011 – There is another piece of legislation coming that closes the loopholeleft open by the Risk Based Pricing rules. On July 22, 2011 the FACS Act goes into effect. The FACS Act, or Fair Access to Credit Scores Act, is part of the financial overhaul better known as “FinReg.”
The FACS Act requires anyone who uses a credit score as their basis for an adverse decision, of any kind, to disclose that score to the applicant. This includes lenders, insurance companies, utility companies and property management companies. The score disclosure requirement will apply for a credit denial or an adverse approval.
The requirements of the FACS Act are more comprehensive than those of the Risk Based Pricing rules and they’re much easier for lenders to understand their obligations.
Who Gets Left Out in The Cold – Neither the Risk Based Pricing rules nor the FACS Act allow for us to get free copies of our credit scores annually like we can get our free credit reports annually through www.annualcreditreport.com. You have to, at least, apply for something in order for the free score to be a possibility. The argument is that if you’ve been approved for whatever you’re applying for at the best rate then you have good enough scores and have less of a reason to see them.
Eh, I’m not sure I agree with that argument.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.