Columnist Pamela Yip, of the Dallas Morning News, wrote this week about a new federal rule that will allow certain consumers free access to their credit scores. Unfortunately, the rule applies mostly to people who have been denied credit, so you really don’t want this to happen to you. But if your credit is denied, you will now have the opportunity to learn more about the reasons for the denial. Here are excerpts from the column:
Starting Thursday, consumers denied credit will be better able to learn why.
That’s when a new rule goes into effect requiring lenders to give you a free copy of your credit score if your application for credit is turned down or you don’t receive the best available interest rate.
Consumers “will actually be able to see their credit score, which has been very difficult for consumers to do,” said John Ulzheimer, president of consumer education at SmartCredit.com. “If the lender pulled a 720, you’re going to get a 720.”
For this, you can thank the Fair Access to Credit Scores Act of 2010.
Previously, consumers only had limited access to the score that lenders used to evaluate your credit, Ulzheimer said.
“If you applied for a mortgage and got turned down, or didn’t get the best interest rate, you would get your credit score for free,” he said. “As long as you applied for a mortgage, you got your score.”
Now things will be different. Here are the circumstances under which you will get a free credit score in addition to when you apply for a mortgage, Ulzheimer said:
You apply for credit and a credit score is used to set the terms of the account.
You’re denied credit based on a credit score.
You’re approved for credit but under less favorable terms.
Your credit card company raises your annual percentage rate because of your credit score.
The lender also must tell you the factors that pulled down your score — such as late payments or maxed out credit cards — and where your score ranks nationally. It also will tell you how to get a copy of your credit report for free.
“The ruling only applies to lenders,” said Bill Hardekopf, chief executive of LowCards.com, a credit-card information website. “If a utility, telephone company or insurance agency has a special scoring system, it does not have to provide a free credit score.”
However, there is one exception to that, Ulzheimer said. “The exception is if the proprietary score uses only information from a credit bureau, then it must be disclosed.”
“For the first time, consumers will get a clear understanding of how they are judged by lenders,” Hardekopf said.
This should force consumers to really think about how they can improve their credit.
“Are they going to be realistically close to being able to qualify for something or are they really so far away that they should hang up [hope] for a loan and really focus on improving their credit?” Ulzheimer said.
The first and most important step you can take to improve your credit score is to pay your bills on time.
“Even if you only pay the minimum, pay your bills on time because late and missed payments are the easiest ways to lower your credit score,” Hardekopf said.
Secondly, pay off your debt.
“High balances and high debt ratios drag down credit scores,” Hardekopf said. “Your debt balance should be less than one-third of your available credit.”
Hardekopf suggests consumers with a good payment history contact their creditors and ask for lower interest rates.
“Then use what you saved in interest to pay down your balances,” he said.
So use this new law to punch up your finances — and your credit score.