When it comes to your credit, the more you know, the better.
Consumers are about to become better informed.
Under federal rules that took effect this month, creditors must notify consumers when their credit report has been used to provide them credit on less-favorable terms than other consumers.
These are the so-called "risk-based pricing" rules under the Fair and Accurate Credit Transactions Act of 2003.
Risk-based pricing occurs when lenders offer different interest rates and loan terms to different borrowers based on their creditworthiness.
Consumers who receive a risk-based pricing notice will be able to obtain their credit report for free so they can review it for accuracy.
As an alternative to providing risk-based pricing notices, creditors may provide consumers who apply for credit with a free credit score and information about that score.
This expands the existing requirement that mortgage lenders must give consumers the credit scores they used in deciding whether to give them a loan.
"Right now there is a credit-score disclosure requirement in FACTA, but it only applies when you are financing a house," said John Ulzheimer, president of consumer education at SmartCredit.com, a credit education website. "This will make the credit-score disclosure requirement applicable in all lending environments when there is an adverse action."
Under final rules issued in 2009 by the Federal Reserve Board and Federal Trade Commission, credit card issuers and other lenders must tell consumers when they've been granted credit on worse terms than other consumers, based on their credit report or credit score.
The risk-based pricing rules expand existing provisions under the Fair Credit Reporting Act that require creditors to provide consumers with an "adverse action" notice if they were denied credit because of their credit history. That notice entitles consumers to free copies of their credit reports.
"With risk-based pricing, if a creditor came back and offered you less-favorable terms, you weren't getting a notice of that because it wasn't an adverse action if you accepted their offer," said Rebecca E. Kuehn, assistant director of the division of privacy and identity protection at the FTC.
"If you got credit granted on less-favorable terms, it wasn't -- under the way the law was written -- considered an adverse action, so consumers didn't know they weren't getting the best rate and may not have been up to speed on their credit and what was going on with it," she said.
Now, if creditors are using risk-based pricing, they will have to tell you that you're getting a higher interest rate because of your credit history.
They can notify you in two ways:
* They can provide you with a notice, telling you they're charging you a higher interest rate because of your credit history.
* They can provide all who apply for credit with a free copy of the credit score used to make their lending decision and how the consumer's score compares to those of other consumers.
This is a key feature because today, most consumers must pay a fee to obtain their credit score.
"It's good because it gives you the score, not a score," said Ulzheimer, referring to the credit scores some companies sell consumers. "This is going to require lenders to become more transparent with their score requirements because they're going to start getting phone calls from people who have information they never had before."
If a lender notifies you that you're paying a higher interest rate because you have bad credit, get a copy of your credit report to see whether there are errors in your credit file.
"Now you will know that you're getting a higher price as a result of your credit score, and the credit score is derived from information in your credit file," said Barrett Burns, chief executive of VantageScore Solutions. "It raises awareness, which is very healthy for the consumer."