New Rules Boost Disclosures About Credit Decisions

By Eva Norlyk Smith, Ph.D.

New credit rules set by the Fed on Tuesday will require lenders to notify consumers applying for credit cards, mortgages, or car loans if they are offered less favorable loan terms because of their credit history and credit score.

Lenders don’t just base their loan decision on applicants’ credit report, they also price the loans according to the risk profile indicated in the report. Typically, both the interest rates and the terms of the loan offered are determined by the information contained in the credit report, not just for mortgages and car loans, but for credit cards as well. Under the current rules, if the terms of a loan or credit card offered are worse than those presented to other borrowers because of information in the credit report, consumers have no way of knowing this unless their credit application is outright declined.

Once the new rules step into effect, creditors offering credit on less favorable terms based on the loan applicant’s credit report will have to notify the person when the terms of the loan are presented. The consumer will also be entitled to receive a free credit report to verify that the information listed in their credit report is correct. Lenders won’t have to provide the notice, however, if they instead give the consumer a copy of his or her credit score. While consumers are entitled to a free copy of their credit report once a year, getting the credit score normally comes with a $8 to $11 fee.

The new rules could prove particularly useful for consumers who unknowingly are paying a higher price for credit, because of inaccuracies in their credit report. According to some estimates, 70 percent of all credit reports contain at least one error. In most cases, consumers are unaware of errors, which could affect their ability to get approved for loans or credit cards with the best terms.

The new rules issued by the Federal Reserve are scheduled to take effect January 1, 2011; they are issued in response to a law passed by Congress in 2003, which, among other things, aimed to bring greater accuracy to credit reporting.

The new Fed rules are another reminder for consumers to actively monitor the information contained in their credit report. In the current risky lending environment, credit scores are more important than ever, and even a small error could be enough to tip you into a less favorable credit territory. Regular credit report monitoring also provides an important defense against identity theft.

All consumers are entitled to a free credit report once a year; you can request your complementary copy by phone at 1-877-322-8228 or download it online at AnnualCreditReport.com. Get a copy of your credit report from all three credit rating agencies, Experian, TransUnion, and Equifax, as each credit bureau differs slightly in the information they have on file. Review each report carefully for errors, and correct any mistake by sending a letter to each reporting agency where the error appears. For greater convenience, most of the credit reporting agencies also now allow you to correct credit report mistakes directly on their websites.

Published: December 24, 2009