If you have less-than-perfect credit, chances are that at some point you have been charged higher interest rates on a loan or line of credit. This common practice is called risk-based pricing. It’s used by lenders to determine for what kind of loan terms individuals qualify based, in part, on their credit history.
Until recently, lenders didn’t have to tell you why you weren’t receiving the best rates. Now, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders are required to provide you with a risk-based pricing notice detailing why you didn’t qualify for better rates and how to obtain your credit report.
Auto dealers have been fighting this requirement, arguing that because the banks are the ones pulling your credit report, the banks should be responsible for the notice—and the dealers should be exempt. A federal judge recently disagreed, arguing instead that because the dealers use the credit reports to determine for what kind of loan rates an individual qualifies, it is the dealers that must provide a risk-based pricing notice.
It’s true that the notice can often be a useful tool in helping consumers understand how their credit score impacts their loan rates. However, the goal of the disclosure notices is actually to give consumers an opportunity to review and fix any credit report mistakes before agreeing to a higher interest rate, said Bob Schoshinski, an assistant director in the division of privacy and identity protection with the FTC.
Understanding the notices you might receive when taking out a loan
If you know your credit history and score before you take out a loan—and you should—then your loan rates shouldn’t come as a surprise. But if you’re not sure why you’re not qualifying for the best rates, a risk-based pricing notice should provide you with an opportunity at the point of purchase to understand why.
If you are given loan terms that are less favorable than those offered to other consumers, you should receive one or both of the following notices:
- Risk-Based Pricing Notice: This notice should include information about your credit history, the credit report or reports used to determine your loan terms, the reason why you received less favorable loan terms than other consumers, and information on where to find your credit report and how to dispute any errors.
- Credit Score Disclosure Notice: Lenders use this notice as an alternative way to comply with the risk-based pricing rule. This notice is sent to all consumers who apply for credit. It contains their credit score and how it was used to evaluate their creditworthiness.
You should receive these notices at the time you are approved for a loan, whether that’s in person or by mail, according to Schoshinski. Ask the lender to explain anything in the notice you don’t understand.
If you aren’t qualifying for the best rates, start taking steps to improve your creditworthiness. And if you aren’t receiving the best possible rates and your lender doesn’t give you a risk-based pricing notice, you can file a complaint on the FTC’s website.
Ilyce Glink is a best-selling author, real estate columnist, and web series host. She is the managing editor of the Equifax Finance Blog and CEO of Think Glink Media. Follow her on Twitter: @Glink
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