Got a bad credit deal? In 2011 you'll know why

Have you been offered a bad credit deal by a lender but don't know why? Starting in January 2011, banks will have to tell you why and give you free access to your credit report any time you're given less-favorable terms, according to final rules issued Tuesday by the Federal Reserve and the Federal Trade Commission.

Until that time, lenders don't have to explain why you're getting particular terms on any form of consumer credit, including credit cards, auto loans, mortgages and student loans. The rule change doesn't impact business lending.

Starting in 2011, lenders will be required to send you a notice when you're granted terms "materially less favorable" than "a substantial proportion" of the lenders' other customers.

Unfortunately, this doesn't mean you're going to get a better deal. All the rule does is provide you with an opportunity to review your credit report for errors and contest any rates you think might have been determined based on incorrect data.

Even better than depending on this new rule would be to request a free copy of your credit report from all three credit reporting agencies before you even apply for credit and avoid needing to use this rule at all. You can even take advantage of those free reports starting today, though you're only allowed one free report per agency each year.

The final rule for this new "risk-based pricing notice" includes two key terms: "material terms" and "materially less favorable." Material terms can include an annual percentage rate or, if there is no annual percentage rate, can include an annual membership fee or required deposit.

The key will be whether these material terms are "materially less favorable" compared to the type of credit being extended by the company to other consumers that will result in you having higher costs for credit.

Lenders must provide a "risk-based pricing notice" if they reviewed a consumer report in connection with the application to make a decision and if this credit report was used in whole or in part to make the decision about the terms to be offered. Lenders are required to make this determination on a case-by-case basis but are allowed to use two alternatives that will be less time consuming and cumbersome:

  • Credit score proxy method. This method assumes a credit score is a numerical representation of a consumer's credit risk based on information in the consumer's credit file. The creditor will set a cutoff score for the best credit terms, which they will grant, extend or provide to at least more than 40% of consumers. Anyone below this cutoff point would receive risk-based pricing notices. The creditor must periodically update the cutoff score.
  • Tiered pricing method. Creditors using this method will set the material terms of credit by assigning each consumer to one of a discrete number of pricing tiers, based in whole or in part on a consumer report. Any consumer not assigned to the top pricing tier or tiers must be sent a risk-based pricing notice. The number of tiers to whom the notice is required to be given depends upon the total number of tiers.
Once this rule goes into effect about a year from now, you'll receive a notice any time you're not given the best terms. It will then be up to you to determine whether you want to accept the "materially less favorable" terms or reject the card and apply elsewhere. You'll also be given the option to review your credit report, correct any errors and then ask for a new review of your application.

Lita Epstein has written more than 25 books including "The Complete Idiot's Guide to Improving Your Credit Score."
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