Demystifying the art of the deal

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As businesses executives have noticed, recent changes in the credit laws reflect a move toward more transparency. For example, it’s generally lawful to factor a consumer’s credit history into your decision about what rate to offer them. But last year, the FTC and Federal Reserve Board shed a little more light on that process by implementing the Risk-Based Pricing Rule.

The Rule requires companies to let consumers know when — based on their credit reports — they’re being offered credit terms that are less favorable than most other customers. How does that work? If someone is shopping, say, for a car and the dealer uses their credit report to decide to offer them a 12% APR when most of the dealer’s other customers are offered 7%, the dealer has to give them a risk-based pricing notice. The notices let consumers know there might be something amiss in their credit report that’s preventing them from getting the best deal. The Rule also entitles them to a free copy of their credit report.

These notices are useful, but they were missing one key piece of information: a credit score. That has just changed. As of July 21, 2011, if your company uses a credit score in the determination of who’s eligible for favorable credit terms — and who isn’t — that risk-based pricing notice now must include the consumer’s credit score and additional information about that score.

The new provision builds in some flexibility for businesses. You can choose to comply with the Rule simply by giving all consumers who apply for credit a copy of their credit score. It makes sense. If a less-than-impressive credit score is part of the reason an applicant didn’t get the deal others got, they’re entitled to know that, to learn more about why their score is what it is, and to fix any mistakes that may be putting a crimp in their credit.

In the long run, the new provision is a net plus for businesses, too. When consumers see how a compromised credit score hits them in the pocketbook, they may be more likely to manage their credit better, keep their accounts current, and take other steps to boost that score. And aren’t those the kind of efforts most businesses want to encourage in their customers? For more information, check out the amendments to the Rule.

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