If you recently applied for credit, you may have received a notice from your lender titled “Your Credit Score and the Price You Pay for Credit.” If so, you have received a Credit Score Disclosure (CSD) notice that provides your credit score and other important related information, in compliance with the Risk-Based Pricing rule. The CSD notice is one of two types of disclosures designed to increase awareness that your credit history is being used by a lender to make a decision to extend you credit. This type of notice is sent to all approved applicants. Lenders can use the Risk-Based Pricing (RBP) notice instead of a CSD notice as an alternative method of complying with the regulation.
The Risk-Based Pricing rule went into effect in 2011. Risk-based pricing reflects the common practice of setting credit terms, such as interest rate or credit limit, according to a consumer’s credit risk. Lenders that employ risk-based pricing generally offer more favorable terms to consumers who have credit histories that reflect lower risk and less favorable terms to those whose credit histories reflect higher risk.
The Risk-Based Pricing regulation is intended to broaden the understanding of credit reports and credit scores, as well as improve the accuracy of your credit report. The CSD notice includes not only your credit score – the one that was used in making the credit decision – but other important information that helps you check and improve your credit health. A sample of the two-page CSD notice can be found in Figure 1 below. Also, it is important to be aware that regulations which went into effect in July 2011 do not impact those lenders that choose to send CSD notices to comply with the Risk-Based Pricing Rule.
FIGURE 1: Sample Credit Score Disclosure notice. Actual notices may vary in format.
The notice contains four key elements:
A CSD notice received in connection with the approval of a loan secured by one to four units of residential real property (such as a mortgage or home equity line of credit) will include an extra section entitled “Key factors that adversely affected your credit score”. Refer to Figure 2, below, for an example of the relevant portion of this notice. In the “Key Factors” section you will find up to five brief remarks – commonly known as score reasons or score factors – that explain what aspects of your credit history most significantly influenced your credit score. The FICO®Score Factors Guide offers a summary list of the most common types of FICO® Score reasons. This is valuable information that can serve as a general guide for what you need to do to improve your FICO® Score.
FIGURE 2: “Key Factors” section of a Credit Score Disclosure for loans secured by Residential Real Property