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Overlap of rules to spread scores

By Leslie McFadden · Bankrate.com
Monday, July 26, 2010
Posted: 9 am ET

A provision in the new financial reform law will allow consumers turned down for credit or offered less favorable terms because of their credit report or score to get a free credit score disclosure with their adverse action notice. An overlapping set of federal regulations that were finalized last year will likely broaden access to free credit scores even further when they go into effect Jan. 1, 2011.

What do the risk-based pricing rules say?

The statute generally requires a creditor to notify individual consumers anytime it uses their "consumer report" to provide them with "material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor." Those who receive a risk-based pricing notice can then check their credit report for free.

"Material terms" generally means the APR, or in the case of charge cards, the annual fee or deposit requirement, says Ed Rice, general counsel at Zoot Enterprises Inc., a provider of credit decisioning and loan origination solutions in Bozeman, Mont. The term "consumer report" includes both credit reports and credit scores, he says.

To determine whether a consumer should receive the risk-based pricing notice, issuers can directly compare the terms that different customers receive, or use one of two methods.

  1. Credit score proxy method -- The creditor uses a 40 percent, 60 percent score cutoff approach. "What the creditor does is it takes a sampling of its product lines and looks at what the scores are for people in the top 40 percent versus the bottom 60 percent," says Rice. The applicants with scores below the cutoff automatically get the risk-based pricing notice.
  2. Tiered-pricing method -- People who don't place in the top pricing tier or tiers due to their report receive a notice. For instance, when there are four tiers, anybody in the bottom three tiers gets a risk-based pricing notice.

A special exception to the notice requirement is if issuers  provide a free credit score disclosure, along with other information about their score, to all applicants regardless of their creditworthiness. The score must be the one actually used by the creditor.

Rice believes card issuers will prefer the score disclosure option over having to send risk-based pricing notices. A risk-based pricing notice "tells the consumer that 'guess what, you didn't qualify for our best thing,' whatever that thing is," he says. "Nobody wants to do that, no bank wants to do that."

What the overlapping rules mean for you

The requirement under the Wall Street reform legislation will benefit people that have been penalized by their score. Creditors that use the credit score disclosure method to comply with the new risk-based pricing rules will help every applicant, regardless of their score.

Would you care to know your credit score if it didn't qualify you for the very best credit terms?

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11 Comments
Leslie McFadden
July 30, 2010 at 12:50 pm

Debra,
Please do, although I wouldn't expect a free credit disclosure just yet. The rules aren't in effect yet.

Debra James
July 30, 2010 at 12:48 pm

Leslie,

I just contacted AmEx to convert one of my accounts into a different type that they offer. They ran a credit check on me, and I was approved, of course, but I will let you know what types of disclosures that I receive via mail or email. I am quite curious to see how things have changed since I last opened a new credit card account a few years ago.

Leslie McFadden
July 30, 2010 at 9:46 am

Debra,

I think the new rules (see above blog) go a long way towards establishing free access to credit scores. Not just any score, but the one actually used by the creditor.

If a creditor uses the credit score disclosure method to comply with the new risk-based pricing rules, then every applicant, regardless of whether they get approved or not, would receive a free copy of the score actually used by the creditor.

In addition, you'll receive the score the creditor actually used if the creditor takes an adverse action against you, or approves you for a higher interest rate because of your credit report or score under new rules set forth in the financial reform law. The score you receive might not be one you can buy in some cases.

Debra James
July 29, 2010 at 5:32 pm

Leslie,

Thanks for the follow up.

An even better consumer service would be to allow a person to buy a copy of the credit score after they have been approved for credit. Like you said, the score that I buy at MyFICO is not necessarily the same that a creditor uses. This would give the consumer more insight to the disparity between what they purchase and is actually used by the creditor. It is rather frustrating to hear that there are new scoring products out there for creditors that aren't available to the consumer, like the new FICO 8 you reported about.

Leslie McFadden
July 28, 2010 at 2:56 pm

Debra,

I have an answer for you. It comes from TransUnion spokesman Steven Katz: "A lender does not see the inquiry its own pull generated when viewing the report it just pulled."

There you have it.

Leslie McFadden
July 27, 2010 at 4:04 pm

Debra,
Great question! I'm not sure if the inquiry caused by the company doing the credit check would show up that quickly, but I am checking on the answer. I can tell you that checking your own credit report or score will not count against your credit rating.

Keep in mind that the score that a lender uses may not be from the same vendor that you purchased your score from, and even then, the company might be using a different version than what is currently available to the public, such as industry-adjusted scores. In other words, there might be a difference in terms of the actual number that the lender sees. In addition, your scores could be different at each of the credit reporting agencies if the information in your credit reports varies at each agency. So, the score you purchase should guide your expectations, but don't count on the lender seeing the exact same number.

Debra James
July 26, 2010 at 1:19 pm

Can you tell me if the credit score that a company pulls immediately reflects the score "ding" that happens because of the credit report inquiry? For example, if I check my Equifax score yesterday, and it was 700. Will that number be the same or similar when a credit inquiry is made today, or will the score be lower because of the inquiry?