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If You’re Denied a Credit Card or Loan, You Have a Right to Know Why

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One of the changes implemented by the Dodd-Frank financial reform bill will take effect tomorrow, July 21st: if you’re denied a credit card or asked to accept an above-average interest rate, you have a right to know how your credit score influenced the decision. This new protection applies not just to credit card issuers, but to utilities, insurance companies, landlords and anyone who falls under the designation of “creditor.” Now, if you’re turned down or if you are issued a card with a high interest rate, the issuer will have to detail exactly why you have these adverse terms.

In the words of the Federal Reserve, this new law “requires creditors to disclose credit scores and related information to consumers in risk-based pricing and adverse action notices under the Fair Credit Reporting Act (FCRA) if a credit score was used in setting the credit terms or taking adverse action.”

That needs a bit of parsing. If you get abnormal terms on a credit card (a higher interest rate, say), are denied for the card outright, or have to pay a higher insurance premium, then the issuer will have to tell you 1) your credit score and 2) any information they used in addition to your credit score. This is intended to boost transparency and prevent issuers from arbitrarily denying access to credit. We’ve all heard horror stories of peoples’ credit reports getting mixed up; hopefully, these new regulations will address such problems.

What the law says, and what it hopes to accomplish

The new disclosure law is tacked on to the Fair and Accurate Credit Transactions Act of 2003 (also known as the FACT Act). The FACT Act addresses risk-based pricing: people who are considered risky get charged higher interest rates to compensate for the chance that they’ll default. It says that if you get terms that are worse than “the most favorable terms available to a substantial proportion of consumers,” the lender has to tell you about the negative information on your report.

Because of Dodd-Frank, starting tomorrow, lenders will have to disclose your credit score and any relevant information. This is intended to increase transparency around the FICO score, one of the most important numbers in your life. It affects your interest rate, of course, but also whether you’ll be approved for a mortgage, how much you pay for insurance, how you pay your phone bill and in some cases whether you’ll get a job. However, Fair Isaac (the company that issues your FICO score) makes its money off of having a secret formula to calculate your creditworthiness. You can get your credit report for free once a year, but you need to do some legwork to get your credit score for free. And once you do get your score, you won’t get to see the exact formula used to calculate it.

The Dodd-Frank bill hopes to bring a little transparency by requiring lenders to disclose not only your numerical score but also the factors that lowered your score, such as a high debt utilization ratio, a short history or a number of recent applications.

As mandated by the FACT Act, the Federal Reserve prescribed a form letter that lenders must send to people with adverse terms, and recently added the following:

Will it actually help?

Here at NerdWallet, we wonder how much good knowing your exact credit score will do. Chances are that if you have pretty terrible credit, you have some inkling of why. Not all ruined credit scores are deserved, but most people can say why they have a low FICO score. The Dodd-Frank Act will, however, be extremely helpful to anyone whose credit score is off because of mistaken identities. For example, a woman named after her mother was constantly assigned her mother’s low score, even after her mother passed away. But for most people who are given high interest rates, it’ll only serve to confirm what we already know.

Plus, some lenders charge exorbitant rates across the board. They have to disclose their reasoning if they charge you more than what a “substantial proportion” of their customers get, but what if the average rate is ridiculously high? Any number of bad credit credit cards have sky-high interest rates, so it’s unclear whether the new rules would require lenders to disclose to everyone with that card why they pay 10% more in interest than someone with a premium credit card.

If you are denied credit, it’s time to take a look at how to raise your credit score. Here are some tips on getting yourself to excellent credit:

  • Reduce your debt utilization ratio. If you owe a lot of money, compared to your credit limit, you will have a lower score. It’s best to show that you can be trusted with a high limit by not going near your current maximum.
  • Make your payments on time. A solid payment history is the foundation of your credit score.
  • Keep one or two credit cards open for a long time. The length of your credit history, including the average time since your accounts were opened accounts for 15% of your credit score.
  • Don’t apply for a ton of new credit cards at once. As you’ll notice in the Dodd-Frank form letter, lenders have to tell you how many recent inquiries were made into your credit score. It looks suspicious if you have too many.