Since 2011, lenders relying on a consumer’s credit report to make a lending decision and to determine the credit terms must provide one of two types of disclosure notices to comply with new federal regulations – either a Risk-Based Pricing (RBP) notice or a Credit Score Disclosure (CSD) notice.
The RBP notice informs consumers that they may have received less favorable credit terms than others with better credit histories. This notice will be sent only to approved applicants or customers who likely did not receive the lender’s most favorable terms. The RBP notice may be mailed separately from the credit approval letter. A separate law requires that a lender who sends an RBP notice and uses a credit score in making its decision to grant credit must include the credit score along with additional related information in the RBP disclosure. Specifically, this notice includes information about how to obtain your free credit report as well as a disclosure of your credit score, the score range, and the reasons why the score was not better. The credit score content in this notice can be found in Figure 2. If the lender uses a credit report but not a credit score in deciding to grant credit, the lender may send an RBP notice that only includes information related to the credit report as depicted in Figure 2.
Risk-based pricing reflects the common practice used by lenders to set 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 with credit histories that reflect lower risk and less favorable terms to those whose credit histories reflect higher risk.
In addition to further empowering consumers with information about their own credit history, the Risk-Based Pricing regulation through its disclosure notices is intended to broaden the understanding of credit reports and credit scores, as well as to improve the accuracy of your credit report. Not only do the notices inform you that your credit history is being used to set the credit terms offered, it also provides information to help you obtain, review and check the accuracy of your credit report.
The Risk-Based Pricing notice focuses on information about your credit report. In most cases, a credit score will be used – in addition to the credit report – by the lender in making its decision to grant credit. As a result, lenders opting to use the RBP notice will provide a disclosure notice that includes the information found in both Figure 1 and Figure 2. Key aspects of the RBP notice are:
- Use of credit report information in the making of the lending decision – Informs you that your credit report was used in the lending decision and, as a result of the your credit history, the terms offered may be less favorable than what is provided to consumers with credit histories that represent lower risk.Though the notice indicates you may have received terms that are less favorable, with the exception of a few circumstances, most consumers receiving this notice will likely have received less favorable terms from the lender.
- Your credit score and related information – The RBP notice includes your credit score used by the lender, the score range for that particular scoring model, and the key factors or reasons why the score is not better. The credit score is a numerical representation of information in your credit report, and provides an easy-to-use tool for helping lenders understand the likelihood of a consumer paying as agreed on a credit obligation.The general-risk FICO® Scores which are in use today by the vast majority of lenders all fall within the 300-850 score range, where a higher score reflects lower credit risk. Industry-specific FICO® Scores, such as those for auto lending or bankcards, were developed to accommodate the unique characteristics of their respective industry and may have ranges outside the 300-850 score range. The range of score model used by your lender will be clearly documented in your disclosure notice allowing you to see where your score falls in that range.
- Information regarding how to obtain a free copy of your credit report – As a result of the Risk-Based Pricing law, recipients of the RBP notice (i.e., consumers who are approved for credit and likely received less favorable credit terms than other consumers) are entitled to receive a free copy of their credit report. Previously, this was only available to consumers when their credit application was declined. Now, in both cases, requests for a free copy of the credit report can be made within 60 days of receiving the notice. It is important to keep in mind that the no-charge copy of your credit report will not include your credit score. The credit score and credit report are equally important and should be monitored periodically to ensure your overall credit health. To learn more about your credit score, see the FICO® Scores section.
- Reminder to correct credit report mistakes – Credit reporting agencies are independent, for-profit companies that compile information about you (such as whether you pay your bills on time and how much you owe to creditors) from a variety of sources. Sources of information provided to credit reporting agencies may include your bank, credit card companies, mortgage provider, and auto lender. The information these sources provide is maintained in your credit report. It is a good idea to regularly check your credit report for possible errors. Mistakes in your credit report may affect your ability to get credit or the quality of the credit terms you receive. You should dispute inaccurate information in your credit report.
- Credit Reporting Agency (CRA) information – The RBP notice includes the credit reporting agency name and contact information. This information is intended to facilitate the process of obtaining a no-charge copy of your credit report from the CRA and rectifying any errors in your credit history.
If you received a Risk-Based Pricing notice, you will want to make sure you request the no-charge copy of your credit report from the listed credit reporting agency within 60 days. Upon receiving the credit report, you should confirm its accuracy and request corrections that may be necessary.
ScoreInfo.org offers insights you need to manage your credit health including Tips for a Better FICO® Score, Credit Basics and FICO® Score Basics.