If you're in the market for a business opportunity or other small business or franchise, your credit standing may very well be a critical part of your ability to get started and stay afloat, especially during the first year. That’s why it’s so important for you to understand what your personal credit rating is, what it all means and where you stand going into the lending process.
A new rule passed just this past January will ensure that lenders tell you if a poor credit score will have a bearing on the terms of your loan, such as a higher interest rate. In addition, another new rule that goes into effect this summer tightens the disclosure requirements and ensures lenders give more borrowers free credit score information.
Crafted in an effort to make the lending process more transparent, these new regulations should help borrowers to better understand why their interest rates are what they are. However, the changes are also causing some confusion when it comes to credit reports versus credit scores and what’s free, what isn’t and when.
Given all the misinformation and misunderstanding floating around, here are some key things you should know...
Under the new rule passed early this year, lenders must disclose information to borrowers in one of two ways:
- They must provide them with a copy of their credit score and the source of the information, as well as the range of scores against which they were measured; or
- They must furnish a letter stating the borrower was given a less favorable rate due to the fact that he or she was deemed a credit risk. The letter must also include the name of the credit bureau relied upon to make the decision. Please note that this second option will no longer be applicable as of July 21, 2011, when revised legislation will ensure all borrowers who are denied credit or who are made to pay higher rates will be told their score.
The new rules referenced above will only apply to consumers who have been denied credit or who have applied for it. Not everyone will be entitled to a free copy of their credit score. If you’re someone who just wants to know your score, but who is not seeking a loan, then you’ll have to pay for it―so shop around carefully for the best deal at the best price. One copy of your credit report will still be free from each of the major credit bureaus in any given year, regardless of whether you are a potential borrower or not.
Although FICO scores have always been the norm when it comes to gauging your credit worthiness, Vantage Scores, as well as a number of other rating systems are gaining in popularity. It’s important to do your homework on the range of score options and what each one of them means, as well as which bureaus use what scores and for what purpose.
The business of applying for and receiving credit can be a complicated one for sure, but it gets a lot easier if you do some basic research before you start the process. So take some time to visit the websites of the foremost credit bureaus―Equifax, Experian and TransUnion; and to request your free annual copies of your credit report from any one of them, start by going to www.annualcreditreport.com.
