If you’re not feeling a lender’s love, you’ll soon know exactly why you got jilted.
As of last week, if a lender denies you a credit card, a car loan or other loan product based on your credit score, you’re entitled to a free copy of that score. You’ll also get a list of the reasons why you got rejected. Ditto if you get a less-than-favorable interest rate on a new loan.
Some credit experts call the new disclosure rules a historic change in how consumers are treated by lenders.
It’s all part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress enacted last year to give consumers more clarity in their financial life. The legislation also created a new Consumer Financial Protection Bureau.
The bureau’s mission is to ensure that consumers know exactly what they’re getting with mortgages, credit cards, loans and other financial products. Or as the bureau’s fledgling website (consumerfinance.gov) notes: It’s to ensure that “prices are clear up front, that risks are visible, and that nothing is buried in fine print.”
And part of that clarity is knowing why you got dinged by a lender.
In the past, if you were rejected for a credit card, you might not get any explanation. Under the new rules, you’ll now get — in the mail — the exact score used by the lender when reviewing your credit application. The letter will also include the reasons why your score was considered risky: too many late payments, balances too high, too many credit card applications, etc.
“For consumers, this is the first time they’ll see their real score used by the lender. It’ll give consumers an exact picture of where they stand in the lender’s eyes. … And they’ll get this in the mail without even asking,” said John Ulzheimer, president of consumer education for SmartCredit.com. “It’s a historic change.”
Just as a refresher, the mostly commonly used credit score, known as the FICO, is a three-digit number between 300 and 850. It determines how much — or how little — you’ll pay for all kinds of borrowing, from student loans to credit cards to home mortgages.
The higher your score, the better your chances of getting approved for a loan and the lower your interest rate, which can mean huge savings in the long run.
Note: Credit scores are not the same as credit reports, which are the histories of all your bill payments, loan balances and delinquencies. Credit reports are compiled by the three reporting bureaus (Experian, Equifax and TransUnion).
The new rules do not cover mortgage loans, which already require disclosure of credit scores. They also don’t apply to applications for insurance, since those don’t generally rely on credit scores.
Those with good credit won’t get a credit score letter in the mail, but the new rules “validate” that you’re getting the best possible rate from a lender, Ulzheimer said.
For those who do get rejected or receive a less-than-ideal APR, the lender’s explanatory letter “empowers consumers to actually go out and improve their score. They know why it isn’t higher,” he said.
And one last note on the new disclosure law: “It underscores the importance of opening that mail from a lender,” Ulzheimer said. “At the very least, the consumer will now have a road map to better credit.”
RAISE YOUR SCORE:
Want to pump up your credit score? Here are some tips:
—Get your credit reports: Once a year, you’re entitled to a free copy from each of the three credit reporting bureaus (Experian, Equifax and TransUnion). To request copies, go to: annualcreditreport.com.
Then check them for errors: erroneous late payments, charges that aren’t yours, collection notices that are more than seven years old. If you find errors, contact the creditor and the reporting bureau to clear your record.
—Pay your bills on time: “It’s one of the best things you can do: Pay on time and at least make the minimum payment,” said Bradley Graham, product management director for FICO.com in San Rafael, Calif.
That’s because timely payments are the biggest percentage — roughly a third — of your credit score. Even if you’ve missed a few payments, getting back on track will improve your score over time.
—Limit what you owe: It’s obvious advice, but the lower your monthly balance, the better off your credit looks. For instance, if you have a $10,000 credit limit, but typically only keep a $2,000 balance, you’ve got a huge chunk of unused available credit. That’s a plus in a lender’s eyes.
—Don’t apply too often: Every time you apply for a new credit card or loan, it’s called an “inquiry.” And too many inquiries in a short period of time can be a red flag on your credit score.
“If you apply for a mortgage loan, the sofabed warehouse to finance your new bed, a department store card to get 10 percent off … those begin to add up. They indicate to lenders that you may be somebody who might be riskier,” said Graham.
However, if you’re shopping for a single type of loan in a short period of time — say, to finance a home or auto — those multiple credit inquiries are treated as a single request and won’t count against you. Same for an employer requesting your credit score for a job application.
—Avoid closing accounts: If you’ve got unused credit cards or those that carry a low balance, keeping them open can help your credit score.
Source: McClatchy-Tribune Information Services.