New Federal Consumer Protection Rules – What You Should Know

On Jan. 1, new federal consumer protections went into effect on issues ranging from transparency on credit reports to safeguards against identity theft.

The provisions affecting credit reporting are actually the result of a law passed seven years ago — the Fair and Accurate Credit Transactions Act of 2003. The law requires lenders to tell consumers when negative information is going to result in higher rates and fees for mortgages, credit cards and other loans.

This is known as a “risk-based pricing notice” — a piece of information that surfaces early in the loan process to allow consumers to make corrections on their credit data that could lead to better pricing. Consumers who receive these notices can obtain one free credit report to verify the accuracy of the notice.

Also on Jan. 1, the Federal Trade Commission started enforcing rules to require businesses that handle credit to adopt written plans to identity, detect, monitor and respond to potential cases of identity theft. Called the “Red Flags” rule, it affects traditional banks or thrifts, but also credit-granting organizations like auto dealers.

But until the Consumer Financial Protection Bureau opens in July, consumers should re-acquaint themselves with rules affecting their credit reports and scores. In the meantime, there are some good rules of thumb to follow in improving one’s chance for credit, according to the Fed:

Pay your bills on time: If you’ve paid bills late, had an account referred to a collection agency or declared bankruptcy, this history will ding you.

Get your debt levels down: Most scoring models downgrade your credit score if your accounts are close to your credit limit.

Aim for a score of 700 or better: Many banks consider their most desirable customers to have credit scores of as much as 730 or more to get the best rates. 
 
How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.

Don’t over apply for credit: If you have applied for too many new accounts recently, that may negatively affect your score. However, either you or outsiders checking your credit reports or scores won’t affect this because they’re not applications for credit.

Note your mix of credit: Many credit-scoring models rank customers lower when they have too many finance company accounts or credit cards. Get all your non-deductible debt to less than 50 percent of your credit line in each account. Go after your balances with the highest interest rates first, and once you hit 50 percent keep trying and get those balances down further.

Start budgeting: If you’ve never reviewed your spending and picked out areas where you can cut, you’ve never done a budget. Start tracking your spending either on paper or with financial planning software and start pinpointing what spending you can shift over to paying off debt. 

Get some advice: You might be focused on pulling together a down payment, but it might not be a bad time to sit down with a tax professional or a financial adviser to talk about the way you're going to manage your debt going forward.

Keep an eye on your credit reports: Remember that you have the right to get all three of your credit reports — from Experian, TransUnion and Equifax — once a year for free. You can do so by ordering them at www.annualcreditreport.com. Don't order all three of them at the same time, though. By staggering receipt of each of your credit reports, you'll get a continuous picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them — errors can drag down a credit score — and you’ll also keep an eye on identity theft. Also, keep in mind that all “free” credit report sites are not free — if they ask you for a credit card number, remember they’re doing that because they want to charge you. Just go to the site above and you’ll be fine.

Once you’ve paid it off, don’t close the account: In the world of credit scoring, closing accounts (even those that have not had balances for years) is a lousy idea. Lenders want to see a long record of credit management, and longtime accounts that you haven't touched in years may actually help your score because it shows you have some restraint.