On December 1, Coloradans and others living in Western states will be first to benefit from a new federal law allowing consumers to get a free copy of their credit report. The law, passed by Congress in 2003, is the Fair and Accurate Credit Transactions Act (FACTA). Consumers elsewhere in the nation will have to wait another year before they can get their free reports. If you’re not sure how to order your report or read it, the folks behind Consumer Reports offer this free guide. As to why you should get a copy, check out Sunday’s New York Times article about soaring interest rates being charged by credit card companies. In a nutshell, it’s not just your payment history that affects your credit card interest rate. You can be current in your payments and still have your credit limit reduced and your interest rate hiked.
In the last few years, lenders have more frequently raised customers’ rates because of slip-ups elsewhere, like late payment of a phone or utility bill, or simply because they felt a customer had taken on too much debt.
One reason is your “credit score.” It’s a universally accepted number used by an increasing number of industries with whom you have financial interactions.
Credit scores are used to determine everything from how much a person can borrow to how much he or she pays for life insurance to whether he or she can rent a home. A utility company in Texas even experimented last summer with using credit scores to set prices for electricity. The people who compute your score are mere numbers-crunchers. They don’t determine whether you get a loan or credit. They simply take information collected by the three largest credit-reporting agencies, Experian, Equifax and TransUnion, and apply mathematical formulas to boil it down to a single number on a scale that runs to 850.
720 or higher is OK. A score of 620 is considered a risk and you may start seeing your increases in the cost of credit and decreases in the amount of credit offered to you.
“If we see indications that a customer is taking on too much debt, has missed or is late on payments to other creditors, or is otherwise mishandling their personal finances, it is not unreasonable to determine that this behavior is an increased risk. In the interest of all of our customers, we must protect the portfolio by adjusting a customer’s rate to compensate for that increased risk.”
Think they haven’t gotten around to you yet? Think again. This one company has scored more than 75 percent of American adults to date. Interest rates of 26 percent are not uncommon now. Isn’t that usury? No. Because the credit industry, believe it or not, is pretty much unregulated. Credit card companies are affiliated with banks and banks fall under the jurisdiction of the Office of the Comptroller of the Currency. Their concern is whether banks are sound, not whether you go broke. Here’s what its spokesman had to say:
… as long as the lenders were not intentionally deceiving their customers, they were free to set whatever rates and fees their home states allow. If customers do not want to pay a particular rate, “they have choice,” she said. “They can find another card.”
What’s fair notice? It’s the 12- page fine print that you probably threw away when your card arrived. Check out this snippet from a Bank One Visa card pamphlet (now a J.P. Morgan Chase card):
“We reserve the right to change the terms at any time for any reason.”
So make a note in your calendar to order your free credit report on December 1. At least you can plan ahead if you see that your score is not up to snuff. And remember, it’s a veritable gold mine out there these days for credit card companies.
Last year, card issuers made $2.5 billion a month in profit before taxes.