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As of July 21, if you are denied credit and your credit score had an impact on the decision, lenders are required to provide that credit score to you, free of charge. This new rule, part of the Dodd-Frank financial reform that went into effect in late 2010, will, in theory, make it easier for consumers to gain better control of their finances because they will know where their credit stands.
Knowing your credit score permits you to work to improve it so you can enjoy lower interest rates on credit cards and installment loans, lower car insurance rates, and many other benefits.
Additionally, the new rule that gives consumers free access to their credit score lets people ascertain why they were turned down for a specific loan so they can take steps to fix their financial situation.
When It Comes to Borrowing, Information Is Power
Congress realized that information is power for consumers. So now lenders must disclose more information than ever.
Under the law, lenders must disclose:
- the range of possible scores under the model used to generate the score (for instance, from 300 to 850 for a FICO score)
- the date the score was created
- Name of the consumer reporting agency or entity that provided the score
- Up to five key factors that hurt the credit score, if one of the factors was the number of hard credit inquiries and four key factors if hard credit pulls do not affect the score
Currently, consumers are eligible to request a copy of their credit report from the three major credit reporting bureaus (Experian, TransUnion and Equifax) if they are denied credit. Increasingly, credit scores are being used to determine an individual’s creditworthiness.
The new law also will make it easier for consumers to understand why they are viewed as a poor credit risk if they are denied credit.
Consumer Financial Watchdog Group
As part of the controversial Dodd-Frank financial reform, the Consumer Financial Protection Bureau will be established as a consumer watchdog agency on July 21. The bureau will complete many tasks designed to help protect consumers’ interests when dealing with banks, mortgage companies and other lenders.
Some of the tasks of the CFPB include:
- Completing a mandatory study to determine whether the credit scores available to consumers for a fee are the same scores lenders use
- Enforcing the new credit score disclosure rules
- Heading up the new Office of Financial Literacy
Even before the Dodd-Frank legislation, consumers who were turned down for credit were eligible to receive each of their three credit reports from the major reporting agencies. But a credit report or credit score alone does not tell the full story of someone’s financial health.
You can have no negative items, for instance, on your credit report, but a low score simply because you don’t have a long credit history. Similarly, if you have a long credit history, one or two negative items on a credit report may not affect your score badly; you might still qualify for low-interest loans.
By tracking your credit score, you can better gauge what actions you need to take to improve your financial health and get better interest rates on loans, which could help you save money in the long run. (If you’re applying for a mortgage, a higher credit score could save you thousands of dollars.)
While any credit score is helpful to give you a snapshot of your financial health, it’s best to view the scores lenders use to discern your creditworthiness, along with the points range of that particular score.
If you are denied credit, don’t view it as a bad thing; consider it an opportunity to obtain free copies of your credit score and credit reports and use the knowledge to begin to pay down your debt and improve your financial situation.