subject: New Law May Help Some Understand Risk-based Pricing, Credit Scores [print this page] Recently passed regulations will now give those who compare mortgage rates and even those who compare credit card offers greater understanding of how their rates and payment estimates are derived.
Under the new laws, which were implemented on January 1, creditors must alert consumers when their credit reports have been used to give them less-favorable rates than other customers.
This process, known as risk-based pricing, happens when different interest rates are given to consumers based on their credit history, The Dallas Morning News reports. In addition, those who are deemed a greater risk, and receive higher rates as a result, will also be provided with a free credit report and information relating how the company determined their rates.
Passed under the Fair and Accurate Credit Transactions Act, the newly implemented laws expand on existing requirements, which mandate issuers give consumers the credit scores they use when making decisions on loans, the news source says. However, the expanded information consumers will receive may make it easier for applicants to determine areas of their financial record that need to be improved.
"Now you will know that you're getting a higher price as a result of your credit score, and the credit score is derived from information in your credit file," Barrett Burns, chief executive of VantageScore Solutions, told the news source. "It raises awareness, which is very healthy for the consumer."
Creditors can dispense this information in one of two ways. They can choose to provide the consumer with a notice, disclosing the decision and how a credit history was used to derive it, or they can provide applicants with a free copy of their credit score and how it relates to those of other customers.
This will likely save those searching for mortgages and credit cards additional funds, as it effectively provides them with a free way to access their credit scores. Proponents of the new disclosures also say this will make it easier for consumers to find errors in their report, as they will have more access to the information.
Consumers will also have an additional advantage as the new process allows them to check and see how different companies choose to handle their data.
In the past, this information would not be available to applicants, a process that often left those who believed they had qualifying credit scores to wonder why they were denied. However, this new system should be help illuminate these decisions to the average individual.
