You may be a pillar of your medical school community, admired by your medical student colleagues and beloved by friends and family, but if you have a mediocre credit score, you probably won’t be able to get a decent interest rate on a car loan, mortgage or credit cards. This is a fact of life.
That does not sit well with a lot of people, but what really annoys borrowers is the secrecy surrounding the credit-scoring process. I am not an expert, but in my reading up on the subject, I can see why there is this mistrust and frustration among people like you and me. A federal law enacted in 2003 requires the three credit bureaus to provide consumers with a free annual copy of their credit reports, but they’re not required to include your credit score. To access the website, click on https://www.annualcreditreport.com/cra/index.jsp.
But this year, free and relevant credit scores will become much more widely available. Why? There are two reasons: provisions of the 2003 Fair and Accurate Credit Transactions Act – the law that requires credit bureaus to give you a free annual report – will impose a new disclosure obligation that could encourage more lenders to provide customers with a free credit score. Under the “risk-based pricing” provisions that took effect January 1, 2011, lenders are required to send a notice to loan applicants who receive a loan with a higher rate than the best rate available. The notice must also explain how the applicant can get a free credit report. However, the law gives lenders who don’t want to wrestle with these notices – and the rules governing who must receive them are complicated – an alternative. If they send all loan applicants a copy of their credit score, they don’t have to provide risk-based pricing notices.
Most lenders will probably choose the second alternative, says Craig Watts, a spokesperson for FICO, developer of the most widely used credit score. In addition to the score, consumers will receive an explanation of the range of the score and a graphic illustration showing how their score compares with other consumers’ scores, a provision of the Dodd-Frank financial reform law that takes effect July 21, 2011. This law will provide borrowers with a free credit score whenever they’re turned down for a loan or charged a higher rate than the best rate available. This “adverse action” requirement will also extend to landlords, utilities and other entities that use credit scores, says John Ulzheimer, President of Consumer education for www.SmartCredit.com.
So, what does this mean, anyway? The end result is that for the first time, millions of consumers will see the credit score that lenders, insurers and others use to gauge risk or the likelihood they’ll repay a loan. Here are some tips given by Sandra Block on Your Money, a columnist featured in the Business section of the Indianapolis Star.
Contact the lender that sent you the score. If you were given a rate that’s higher than the best one available, ask the lender what score you would have needed to get the best deal, Ulzheimer says.
Order your free credit reports. Your credit score is based on information in one or more of your credit reports, so it’s important to know what those reports contain. Yet most people do not take advantage of their right to a free credit report. A survey by the National Foundation for Counseling found that nearly two-thirds of Americans hadn’t ordered a copy of their free credit report in the previous 12 months.
Get educated on what goes into a credit score. FICO has launched an educational website, www.scoreinfo.org, which explains the factors that influence a FICO score. While these changes will put credit scores in the hands of a lot more people, some consumers should still consider buying a credit score. Buying your score several months before making a major purchase, such as a house or a car, will give you an opportunity to improve it before you apply for a loan. This is especially critical for fourth year medical students who will soon be purchasing homes and in some cases a new car.